Norfolk and Western Railway Company v. Liepelt, No. 78-1323

• Court: United States Supreme Court
• Writing for the Court: STEVENS
• Citation: 62 L.Ed.2d 689,444 U.S. 490,100 S.Ct. 755
• Parties: NORFOLK AND WESTERN RAILWAY COMPANY, Petitioner, v. Kandythe J. LIEPELT, Administratrix, etc
• Docket Number: No. 78-1323
• Decision Date: 19 February 1980

444 U.S. 490 100 S.Ct. 755 62 L.Ed.2d 689 NORFOLK AND WESTERN RAILWAY COMPANY, Petitioner,

v.

Kandythe J. LIEPELT, Administratrix, etc.

No. 78-1323. Argued Nov. 5, 1979. Decided Feb. 19, 1980. Rehearing Denied April 14, 1980.

See 445 U.S. 972, 100 S.Ct. 1667.

Syllabus

Held: In a wrongful-death action brought under the Federal Employers' Liability Act (FELA) in an Illinois court, the trial court erred in excluding evidence offered by petitioner-defendant to show the effect of income taxes on the decedent's estimated future earnings, and in refusing petitioner's requested jury instruction 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." Pp. 757-760.

62 Ill.App.3d 653, 19 Ill.Dec. 357, 378 N.E.2d 1232, reversed and remanded.

Howard J. Trienens, Chicago, Ill., for petitioner.

Richard S. Fleisher, Chicago, Ill., for respondent.

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

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or 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, 19 Ill.Dec., at 370, 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.

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Assuming 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

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the 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, 33 S.Ct. 192, 57 L.Ed. 417. 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, 36 S.Ct. 630, 632, 60 L.Ed. 1117.⁵ 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, 227 U.S., at 70, 33 S.Ct., at 196. 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-

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lows 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, 35 S.Ct. 844, 846, 59 L.Ed. 1478 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, 241 U.S., at 489, 36 S.Ct., at 632, 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, 96 S.Ct. 68, 46 L.Ed.2d 58.

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

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Respondent 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 "American Rule." See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141. 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

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what 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...