Opinion ID: 440193
Heading Depth: 2
Heading Rank: 1

Heading: Deduction of Income Taxes

Text: 10 The district court found that a normal, healthy individual with a high school education could expect to work 40.2 years and earn $961,687 in wages and fringe benefits. The Supreme Court of Washington has held that no deduction for income taxes need be made from such an award except where extremely high income is involved. See Hinzman v. Palmanteer, 81 Wash.2d 327, 334, 501 P.2d 1228, 1233 (1972). There was no proof of high prospective income in the instant case, and the district court made no findings with respect to taxes. 11 However, in Felder, supra, we held that, as a matter of federal law, income taxes should be deducted from an FTCA award for lost compensation. A failure to do so will result in the imposition of punitive damages against the government, even if the state has decided not to require deduction in suits between private parties. Id. We reasoned that: 12 The effect is especially punitive where, as under the Act, the federal government is the defendant. By its tortious activity the Government loses the income taxes the decedents would have paid over the years. If the Government were nevertheless required to pay the survivors an amount estimated to equal those lost taxes, it would be doubly sanctioned. Id. at 670 n. 17. 2 13 The United States has not requested reduction of Scotty's pecuniary award on this ground, although it has called the district court's omission to our attention. The government believes the error does not merit reversal because the taxes Scotty will pay on the investment earnings from his discounted award may offset the taxes which the court should have deducted immediately. 14 We have indeed noted that, since income taxes on lost compensation should be deducted, a lump sum damage award should correspondingly be increased by the amount of income tax that would have to be paid on the earnings of the total award. See DeLucca, 670 F.2d at 845. Otherwise, when the court discounts the award to its present value, the plaintiff would be penalized. Because of taxes, he would not receive a portion of the income which is imputed to him from investing the proceeds of his award. Id. at 845-46. Inflating the lump sum award to compensate for this effect is, therefore, a necessary analogue to the deduction from lost earnings mandated by Felder. See Sauers v. Alaska Barge, 600 F.2d 238, 247 (9th Cir.1979). 15 But the district court may not assume that the failure to deduct taxes on lost compensation will offset the taxes on the income generated by the lump sum award unless two conditions are met. Id. First, the state whose law otherwise applies must also have adopted the offset approach. See Hollinger v. United States, 651 F.2d 636, 641-42 (9th Cir.1981). Second, the district court must be unable to arrive at its own reliable estimates of future inflation and interest rates from the testimony of expert witnesses. Id. 16 In this case, however, the offset approach was not available because Washington courts do not use it. Nor do we believe that trial courts may simply ignore these calculations as speculative--so are most predictions courts make about future incomes and expenses. English, 521 F.2d at 75. Where the award is large, the possible adjustments involved in taking taxes into account are significant. See Hollinger, 651 F.2d at 642. We therefore remand to the district judge to adjust the lost earnings award and the total pecuniary damages for income taxes.