DeLucca v. U.S.

Decision Date01 March 1982
Docket NumberNo. 81-5011,81-5011
Citation670 F.2d 843
PartiesPatti S. DeLUCCA, et al., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Marleigh Dover Lang, Washington, D. C., argued, for defendant-appellant; Freddi Lipstein, Michael Walsh, Eloise E. Davies, Thomas S. Martin, Washington, D. C., on brief.

Richard B. Goethals, Jr., San Francisco, Cal., argued, for plaintiff-appellee; Bruce Walkup, Walkup, Downing, Shelby, Bastian, Melodia, Kelly & O'Reilly, San Francisco, Cal., on brief.

On Appeal from the United States District Court for the Southern District of California.

Before SKOPIL and SCHROEDER, Circuit Judges, and EAST, District Judge. *

SKOPIL, Circuit Judge:

In an award of damages in an FTCA case, the United States challenges (1) the addition to the lump sum award of an amount to compensate for taxes on income that will be earned by investing the award; and (2) the time period governing the award of post-judgment interest. We affirm on the first issue and modify the judgment on the second issue to conform to statute.

I.

The United States conceded liability in the death of plaintiff's decedent. The court below awarded the wife of the deceased $483,380 for loss of her husband's earnings and support. This amount was calculated as follows:

                Projected earnings for 1980          $21,468
                ---------------------------
                Less federal income tax              - 3,099
                -----------------------
                Less state income tax                - 1,073
                ---------------------                -------
                After tax income                     $17,296
                ----------------
                Less 30% for decedent's consumption  - 5,189
                -----------------------------------  -------
                     Annual Loss of Support          $12,107
                    -----------------------          -------
                

The court then found that the rate of wage increases and the discount factor would "essentially balance off each other," so it simply multiplied the $12,107 by 30.5 (the expected work life of the deceased). The award for loss of support came to $369,263.50. To this the court added.$21,793 (loss of support from accident to date of trial) for a total of $391,056.50.

The district court then added an amount to compensate for income taxes on the investment earnings of the lump sum award. It is this part of the calculation the government challenges. The district court stated:

Since it is assumed that plaintiff wife will invest her award, a full compensation for loss of future support should also take into account the fact that income taxes must be paid on her investment earnings. Norfolk and Western Ry. Co. v. Liepelt, (444 U.S. 490) 100 S.Ct. 755 (62 L.Ed.2d 689) (February 1980). Cf. Sauers v. Alaska Barge, 600 F.2d 238, 247 (9th Cir. 1979). To provide plaintiff wife an income of $12,107.00 after paying state and federal income taxes reasonably approximated at a 20% effective rate, she must be given $15,134.00 ($15,134.00 X 80% = $12,107.00). To compensate for loss of support over 30.5 years, she should therefore receive $461,587.00 (30.5 X $15,134.00) as the present value of loss of support.

The total loss of support to plaintiff was therefore increased to $483,380.00 and judgment was entered accordingly.

The district court provided for interest on the total damage award at 4% per annum "from the date of judgment November 4, 1980, until this judgment is satisfied."

II.

The issues presented on appeal are:

(1) whether the district court erred in adding to the lump sum damage award an amount to compensate for taxes on income that will be earned by investing the award; and

(2) whether the district court erred in specifying that post-judgment interest must be paid beginning on the date of entry of the judgment until the judgment is satisfied.

III.

Damages to be awarded under the Federal Tort Claims Act ("FTCA") are governed by the law of the place of the wrongful act, but are limited to compensatory damages. 28 U.S.C. § 2674. California law, applicable in this case, also limits damages to compensatory damages. In re Paris Air Crash, 622 F.2d 1315 (9th Cir.), cert. denied, 449 U.S. 976, 101 S.Ct. 387, 66 L.Ed.2d 237 (1980); Cal.Civ.Proc.Code § 377.

In United States v. English, 521 F.2d 63 (9th Cir. 1975), this court set specific guidelines for calculating wrongful death damages under the FTCA: (1) calculate the future earnings the decedent could have expected over his life work expectancy; (2) deduct taxes and other amounts the decedent would or could not have contributed; and (3) discount this amount to its present value. Id. at 76.

In Sauers v. Alaska Barge, 600 F.2d 238 (9th Cir. 1979), the plaintiff argued that the district court erred in "failing to increase the lump sum awarded to account for the fact that the interest earned when that sum is invested would be taxable." Id. at 247. The Sauers court rejected this contention. The court stated that

"(m)athematically, the plaintiff is right. Had the judgment called for the defendant to make deferred payments rather than a lump sum award, the funding of such an award would have required either an investment large enough to allow for any income tax on the interest yield of the fund or management of the investment in a manner that would either eliminate, or compensate for, the income tax on its yield."

Id. The court, notwithstanding the mathematical correctness of the plaintiff's argument, held that the plaintiff was not entitled to this increasing factor.

Shortly thereafter, the Supreme Court indicated that this tax on the income generated by the lump sum award should be included in the calculation. Norfolk and Western Ry. Co. v. Liepelt, 444 U.S. 490, 495, 100 S.Ct. 755, 758, 62 L.Ed.2d 689 (1980). In Liepelt, the plaintiff had contended that the decedent's income taxes on his future earnings should not be deducted from the lump sum award. The court rejected this contention and noted that since the income taxes on the decedent's future earnings should be deducted, properly offered estimates of the income taxes on the earnings generated by the lump sum damage award should correspondingly be added:

"Logically, it would certainly seem correct that (the income to be earned by the damage award) 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."

Id. This statement by the Supreme Court indicates the Court finds that a lump sum damage award should be increased by the amount of income tax that would have to be paid on the earnings of the award.

After Liepelt, this Circuit again addressed the identical issue in Hollinger v. United States, 651 F.2d 636 (9th Cir. 1981). This court, in remanding for a recalculation of damages, followed Liepelt and required the district court to adjust the lump sum award for the income taxes on the income generated by the award:

"The interest that Hollinger will earn on the discounted principal in a safe investment, however, will also be taxable. The effective interest rate for an investor is equal to the stated interest rate reduced by the product of the stated interest rate and the investor's tax rate. The principal amount necessary to produce a given after tax yield per month is the principal amount that would be necessary to produce that amount if there were no tax divided by the percentage of his income that the investor retains after taxes. Thus an award of $600,000, not taking the tax on interest into effect, would be increased to $1,000,000 for a 40% tax bracket recipient. Clearly, then, the possible adjustments involved in taking this aspect of taxes into account are significant. Although we have found no cases in our court where such a calculation was made, other courts have properly made such an adjustment. McWeeney v. New York, N. H. & H. R. R. Co., 282 F.2d 34, 37 (2d Cir. 1960). This Supreme Court has also recently suggested that the tax on the discounted principal might properly be considered. Norfolk & Western Ry. Co. v. Liepelt, 444 U.S. 490, 495 (100 S.Ct. 755, 758, 62 L.Ed.2d 689) (1980)."

Id. at 642.

The government argues that the statement in Liepelt was dicta, and therefore is not controlling on this court. However, the Liepelt statement gives a clear indication of how the Supreme Court feels damage awards should be calculated. Even if the statement was not essential to its decision in Liepelt, the direction given by the Supreme Court should be followed by this Circuit. This Circuit in Hollinger expressly considered the Liepelt statement and followed it.

The government offers some calculations to show that even if plaintiff was awarded...

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