Rationales Concerning the Treatment of Federal Income Taxes in Personal Injury and Wrongful Death Litigation in the State Courts
Lauren Guest and David Schap. 2014. Rationales Concerning the Treatment of Federal Income Taxes in Personal Injury and Wrongful Death Litigation in the State Courts. Journal of Legal Economics 21(1): pp. 85–117.
Federal personal income tax law specifies that awards for damages for physical injuries are exempt from federal income taxation. Federal courts (when not diverted by applicable state law) require that the exemption of awards from federal income taxation be taken into account when determining the magnitude of an award; awards for earnings losses in federal courts are thus calculated on an after-tax basis. In contrast, courts in the various states are far from uniform in how tax- advantaged awards for damages involving physical injury are determined. In most states (but not all), the courts make no adjustment to awards in consideration of their tax-advantaged character. Variation also can be observed across the states in the matter of instructing the jury concerning taxes, with the dominant position being one of no instruction. Even when in agreement concerning whether to account for taxes or how to instruct the jury, state courts have often differed substantially in the reasoning offered for their decisions. This article explores such diverse judicial reasoning, systematically summarizing by type of rationale the reasons that have been invoked in the various state courts concerning the treatment of taxes in setting awards and the instruction of juries on the matter of taxes in tort proceedings. Forensic economists can glean from the source material noted the disposition of the courts concerning treatment of taxes and related jury instruction in any venue(s) of interest. More substantially, the survey results make possible a keen understanding of judicial reasoning on the general subjects of tax treatment and jury instruction, and further enable a profound appreciation of the reasons at the fore in particular judicial rulings that have determined accepted practice in state courts.
David Schap, Lauren Guest