Elliott v. El Paso County

• Decision Date: 18 October 1993
• Docket Number: No. 92SC718,92SC718
• Citation: 860 P.2d 1363
• Parties: Gerald ELLIOTT, Petitioner, v. EL PASO COUNTY and The Industrial Claim Appeals Office of the State of Colorado, Respondents.
• Court: Colorado Supreme Court

Page 1363

860 P.2d 1363

Gerald ELLIOTT, Petitioner, v. EL PASO COUNTY and The Industrial Claim Appeals Office of

the State of Colorado, Respondents.

No. 92SC718.

Supreme Court of Colorado,

En Banc.

Oct. 18, 1993.

Rehearing Denied Nov. 15, 1993.

Schur & Olive, Robert Schur, Fort Collins, Steven U. Mullens, P.C., Steven U. Mullens, Colorado Springs, for petitioner.

Law Offices of Gregory B. Cairns, Gregory B. Cairns, Denver, for respondent El Paso County.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol. Gen., John Baird, Asst. Atty. Gen., Denver, for respondent Indus. Claim Appeals Office.

Chief Justice ROVIRA delivered the Opinion of the Court.

We granted certiorari to decide whether depreciation deducted from a self-employed claimant's gross earnings as reported on his federal income tax return should be included in the calculation of his post-injury average weekly wage for determining the amount of temporary partial disability benefits to which he is entitled. We conclude that reasonable depreciation deductions should be included in calculating those benefits. Thus, we reverse and remand with directions the unpublished opinion of the court of appeals in Elliott v. Industrial Claim Appeals Office, No. 92CA0347 (Colo.App. Sept. 10, 1992).

I

On March 24, 1986, Gerald Elliott ("claimant") injured his back in the course and scope of his employment with El Paso County ("respondent"). As a result of this injury, claimant was awarded workmen's compensation benefits ¹ and received temporary total disability benefits from March 25, 1986, through April 11, 1986, at the weekly rate of $171.81. Because respondent could not find a position available which claimant was capable of performing, he did not resume his employment with respondent following his injury. Rather, he began his own business as a dump truck operator and maintained this business from 1986 through 1990.

In January 1990, claimant filed a petition to reopen his workmen's compensation claim alleging fraud, mistake and worsening of condition. ² After a hearing, the Administrative Law Judge ("ALJ") ordered claimant's case reopened based on medical evidence establishing that his condition had worsened. The ALJ determined that respondent should pay claimant temporary partial disability benefits from February 2, 1990 to the present at a rate of $174.98 per week. This amount was calculated first by taking claimant's average weekly wage earned while employed with respondent ($311.80) and subtracting from that amount claimant's post-injury earnings from his trucking business as disclosed on his 1990 federal income tax return. The ALJ determined his post-injury earnings by taking his gross profit of $7,175 and subtracting the claimed depreciation of $4,610. Thus, the ALJ concluded that claimant's post-injury annual income for 1990 was $2,565 or, $49.32 per week. The ALJ then subtracted $49.32 from his average weekly income earned while employed with respondent which resulted in a difference of $262.48. The ALJ then awarded claimant two-thirds of that amount in temporary partial disability benefits (i.e., $174.98 per week). ³

Respondent filed a petition for review on the grounds that it was improper to consider claimant's depreciation deduction taken on his 1990 tax return in calculating his average weekly income for 1990. The ALJ, relying on Fireplace Equipment v. Petruska, 796 P.2d 75 (Colo.App.1990), agreed and issued a supplemental order on October 22, 1991, revising her calculation of temporary partial disability benefits. The supplemental order set claimant's post-injury average weekly wage at $137.98 based on his gross earnings of $7,175 divided by fifty-two weeks. Subtracting that amount from his $311.80 pre-injury average weekly wage and multiplying that amount by two-thirds, the ALJ concluded that claimant was entitled to $115.88 per week in benefits.

Claimant appealed the supplemental order to the Industrial Claim Appeals Panel ("ICAP") which affirmed. He then appealed the ICAP's decision to the court of appeals. The court of appeals affirmed stating: "Our court has previously ruled that depreciation is not deductible from earnings in computing a claimant's average weekly wage. Fireplace Equipment v. Petruska.... We are not persuaded by claimant's argument that Petruska was erroneously decided or that it is inapplicable here." Slip op. at 2.

II

Section 8-51-103, 3B C.R.S. (1986), of the workmen's compensation act provided that "[i]n case of temporary partial disability, the employee shall receive sixty-six and two-thirds percent of the impairment of his earning capacity during the continuance thereof...." Earning capacity is calculated in part, by assessing the average weekly wage earned by the claimant during the period of temporary partial disability. Under section 8-47-101(4), 3B C.R.S. (1986), when the enumerated methods for calculating a claimant's average weekly wage

will not fairly compute the average weekly wage, the division, in each particular case, may compute the average weekly wage of said employee in such other manner and by such other methods as will, in the opinion of the director based upon the facts present, fairly determine such employee's average weekly wage.

As this provision makes clear, the determination of a claimant's average weekly wage must be fair so as to compensate the claimant for actual loss of earnings. See Romero v. U-Let-Us Skycap Services, Inc., 740 P.2d 1004 (Colo.App.1987).

Respondent argues that allowing for depreciation in determining a claimant's post-injury income results in a figure that "is not reflective of his actual earnings." Thus, depreciation should not be included in determining the amount of that income when calculating temporary partial disability benefits. See Broussard v. Zim's Alignment Serv., Inc., 488 So.2d 395, 396 (La.App.1986) ("The sum of money not taxed by the government because of an allowance for depreciation of machinery or equipment is merely used to induce the investor to continue in his business and does not accurately reflect his profits or losses."). Consequently, respondent concludes that Petruska was properly decided and is controlling here. We disagree with the first contention and accordingly, reject the second.

A

Contrary to respondent's assertion, the depreciation allowed under the federal income tax code, see I.R.C. §§ 167-68, does not merely represent "an accounting principle which has been accepted by Congress as a means by which individuals who are self-employed may reduce their taxes." Nor is depreciation simply "an arbitrary factor intended to encourage the general economy within the scheme of taxation." Petruska, 796 P.2d at 76. Rather, the allowance for depreciation deductions is a method by which a capital expenditure for long-lived business property may be recovered over a period of time, as opposed to being recovered in a single year as a business expense. Thus,

depreciation serves essentially the same function as the deduction for such business expenses as wages, rent, interest, and property taxes, except that the allowance is not deductible in a single year but is instead spread out over a number of years.

Boris I. Bittker & Martin J. McMahon, Jr., Federal Income Taxation of Individuals 12.1 at 12-3 (1988).

The expense of purchasing a dump truck is recoverable over a period of time because it is presumed that its useful life is protracted, whereas other expenses are incurred for items, such as gasoline, that are presumed to be consumed at once. See Michael D. Rose & John C. Chommie, Federal Income Taxation §§ 3.22, at 157 (3d ed. 1988) ("In theory, the purpose of the depreciation is [a] deduction to distribute in a systematic and rational manner the cost of property."). Compare I.R.C. §§ 167-68 with I.R.C. § 179. Consequently, depreciation deductions serve essentially the same function as deductions for other business expenses; the difference being the accounting method used in arriving at the appropriate figure for decreasing one's gross income. As such, "[t]he deduction simply protects taxpayers against overstating their profits." Boris I. Bittker & Martin J. McMahon, Jr., Federal Income Taxation of Individuals 12.1 at 12-3 (1988).

Because reasonable depreciation deductions are necessary to accurately determine the appropriate amount of income of those who are self-employed, it follows that such deductions should be taken into account when determining the amount of a claimant's post-injury average weekly wage for purposes of awarding benefits under the workmen's compensation act. In short, the cost of earnings must be considered in measuring those earnings. This is the conclusion reached by the majority of courts which have addressed the question of whether depreciation deductions should be considered in determining the proper amount of benefits to be awarded as workers' compensation. See, e.g., Backaus v. Murphy Motor Freight Lines, 442 N.W.2d 326, 327 (Minn.1989) ("computation of the employee's wage must include some recognition of the return on employee's capital investment"); D & C Express, Inc. v. Sperry, 450 N.W.2d 842 (Iowa 1990) (holding depreciation to be one factor used in determination of taxable income for purposes of calculating average weekly wage from self-employment); Florida Timber Products v. Williams, 459 So.2d 422, 423 (Fla.App. 1 Dist.1984) (reasonable depreciation attributable to claimant's equipment was a proper business expense to be deducted from claimant's gross receipts in determining his average weekly wage); Baldwin v. Piedmont Woodyards, 58 N.C.App. 602, 293 S.E.2d 814, 815-16 (1982) (though depreciation allowed by the Internal Revenue Service may not coincide precisely with actual depreciation, it must be deducted from self-employed claimant's gross earnings); Nortrim, Inc. v. Workmen's Compensation Appeal Bd., 150 Pa.Cmwlth. 196, 615 A.2d 873, 875-76 (1992)...