Selby v. Lovecamp

• Decision Date: 18 July 1988
• Docket Number: Civ. No. L 87-2.
• Citation: 690 F. Supp. 733
• Parties: Myrna SELBY; and Sumner Selby, Plaintiffs, v. Donald R. LOVECAMP, Defendant.
• Court: U.S. District Court — Northern District of Indiana

690 F. Supp. 733

Myrna SELBY; and Sumner Selby, Plaintiffs, v. Donald R. LOVECAMP, Defendant.

Civ. No. L 87-2.

United States District Court, N.D. Indiana, Hammond at Lafayette Division.

July 18, 1988.

Earl C. Townsend, Jr., Indianapolis, Ind., John R. Gambs, Lafayette, Ind., for plaintiffs.

James D. Witchger, Indianapolis, Ind., for defendant.

MEMORANDUM AND ORDER

ALLEN SHARP, Chief Judge.

This case was tried to a jury by able and very experienced counsel. On February 19, 1988, the jury returned a verdict in favor of the plaintiff, Myrna Selby, in the sum of $20,000.00, and in favor of the plaintiff, Sumner Selby, in the sum of $1,000.00. Judgment was entered on the jury verdict, and costs were assessed against the defendant, Donald R. Lovecamp. On February 23, 1988, the plaintiffs filed a motion for a new trial together with supporting memoranda, which raises as the sole and single issue whether this court committed reversible error when it gave its final instruction number 20, which reads as follows:

You are instructed that if you find for the Plaintiffs, it is your duty to fix the amount of damages which the Plaintiffs are entitled to recover, if any, and the recovery allowed should be such an amount as will compensate the Plaintiffs reasonably for all the damages suffered by the Plaintiffs which were a proximate result of the Defendant's negligence. You are instructed that any such award by you in favor of the Plaintiffs will not be subject to Federal Income Tax.

A response and brief was filed by defendants on May 31, 1988. This court first set the same for oral argument on May 17, 1988, which was later continued to June 28, 1988. Thereafter, counsel for the plaintiff indicated that he would not be available for such argument until the fall of 1988. Since the issue has now been fully briefed, the court does not conceive that oral argument would be helpful. Thus, the court will rule without oral argument in the interest of an expeditious resolution of this remaining issue. For reasons set forth below, plaintiffs' motion is DENIED.

It is correct here that the substantive law of Indiana applies in this case based on diversity of citizenship under 28 U.S.C. § 1332 and Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). It is also true that there remains in the Internal Revenue Code a provision comparable to that found in § 104(a)(2) of the Internal Revenue Code of 1954, 26 U.S.C. § 104(a)(2), which provides that the amount of any damages received on account of personal injuries is not taxable income. See also Rev.Rul. 54-19, 1954-1 Cum. Bul.179 (applying this section to wrongful-death awards).

In Indiana, the traditional rule is that the instruction that damage awards are not subject to income tax should not be given. Thirty-two years ago, the Supreme Court of Indiana, speaking through Judge Arterbern in Highshew v. Kushto, 235 Ind. 505, 134 N.E.2d 555 (1956) at page 556, stated:

"Inquiries at a trial into the incidence of taxation in damage suits of the character we have here, would open up broad and new matters not pertinent to the issues involved. Such subject matter would involve intricate instructions on tax and non-tax liabilities with all the regulations pertaining thereto. No court could, with any certainty, properly instruct a jury without a tax expert at its side. In our judgment, such matters are not a proper subject for instruction or argument of counsel."

In Richmond Gas Corp. v. Reeves, 158 Ind.App. 338, 302 N.E.2d 795, 811 (1973), Judge Lybrook, speaking for the Court of Appeals of Indiana, dealt with the refusal to give the following instruction:

You are instructed that any award made to the plaintiffs as damages in this case, if any is made, is not subject to federal or state income tax, and you should not consider such taxes in fixing any award made to the plaintiffs.

Judge Lybrook cited 63 ALR 2d 1393, 1425 in dictating what he described as a "fairly even split of opinion on this issue."¹ He bottomed his decision that the refusal to give the aforesaid instruction was not reversible error on the Highshew case.

A third Indiana case, and the one which is most relevant for these purposes, was decided in 1976. Surprisingly, it did not appear in either party's brief. In Wickizer v. Medley, 169 Ind.App. 332, 348 N.E.2d 96, Judge Staton of the Third District Indiana Court of Appeals found that though it was error under Highshew and Richmond Gas to instruct the jury about income tax consequences of an award of damages, in that particular case the error was harmless. The Wickizer facts were virtually identical to the facts here. A woman, Lillian Wickizer was driving an automobile which was struck from behind by defendant Morris Medley. She and her husband sued Medley for damages. The trial court instruction to the jury regarding damages was:

"I instruct you that any award made to the plaintiffs in this case, if any is made, is not income to the plaintiffs within the meaning of the Federal Income Tax Law. Should you find that plaintiffs are entitled to an award of damages, then you are to follow the instructions already given to you by this court in measuring those damages and in no event should you either add to or subtract from that award on account of Federal Income Taxes."

The jury awarded Mrs. Wickizer $5,600.00 and her husband $4,400.00. The Wickizers appealed the jury award, contending that the damages were inadequate and that the court erred when it gave an instruction on the income tax consequences of an award of damages. The appellate court found that the damages were not inadequate because they were "not so small as to suggest that the jury was motivated by prejudice, passion, partiality or corruption, or that the jury considered some improper element." Wickizer, 348 N.E.2d at 97 citing Henschen v. New York Cent. R. Co., 223 Ind. 393, 399-400, 60 N.E.2d 738, 740 (1945). The court then concluded that the instruction was harmless error, basing its decision on Drolet v. Pennsylvania R.R., 130 Ind.App. 549, 164 N.E.2d 555 (1960), which stated:

If the instructions considered as a whole fully and fairly instruct the jury, error in any particular instruction will not justify a reversal unless it is such as to vitiate the whole charge to the jury. The charge is vitiated only when the instruction is so erroneous that it must be concluded the jurors have been misled as to the law of the case.

Drolet, 164 N.E.2d at 558 (citations omitted). Employing the Drolet standard, the Wickizer court found that the instruction given, in light of the other instructions in the case, merely served to caution the jury to base its award on the evidence and not on speculation about possible income tax consequences. Contrary to being misleading, the instruction actually clarified the damages award issue. After all, the court pointed out, plaintiffs "were not entitled to an inflated award based upon the jury's mistaken belief that a portion of the verdict would be used to pay taxes on the amount recovered." Wickizer, 348 N.E.2d at 100.

Reading between the lines of Wickizer, one wonders whether a scenario exists, where, if all the other instructions are proper, the giving of an income tax consequences instruction would ever be reversible error in Indiana. Indeed, after reading Judge Staton's opinion, one is convinced that the instruction is certainly valuable, if not necessary. Still, Indiana remains one of many states in which the instruction is not to be given.

There are, however, recent federal cases which indicate a trend toward instructing jurors on income tax consequences. In 1980, the Supreme Court of the United States addressed the issue in a FELA case, Norfolk and Western Railway Company v. Liepelt, 444 U.S. 490, 100 S.Ct. 755, 62 L.Ed.2d 689. Justice Stevens, speaking for the court first dealt with the admissibility of evidence of the tax consequences on lost future income:

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. 59 at 70, 33 S.Ct. 192 at 196 57 L.Ed. 417 (1913). 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 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.

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., 485 at 489, 36 S.Ct., 630 at 632 69 L.Ed. 1117 (1916), 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

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