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

Heading: The Pecuniary Award to Scotty

Text: 8 Our cases have established basic steps for calculating pecuniary damages under the FTCA: (1) compute the value of the plaintiff's loss according to state law; (2) deduct federal and state taxes from the portion for lost earnings; and (3) discount the total award to present value. See DeLucca, 670 F.2d at 844; English, 521 F.2d at 76. 9 The propriety of the district court's first computation is not at issue. A tort plaintiff in Washington may recover future earnings and medical expenses as components of a pecuniary award. See, e.g., Herskovits v. Group Health Co-op, 99 Wash.2d 609, 664 P.2d 474, 479 (1983). We have never held, and the government does not argue, that these categories of damages are punitive as a matter of federal policy. See English, 521 F.2d at 70. Nor is the amount of the award, as the government concedes, unsupported by the evidence. Id. Scotty will never be able to work, and will always require special equipment, medication, and therapy. Nevertheless, we cannot affirm this part of the judgment, because the district court did not consider the effect of taxes or properly discount these damages.
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.
17 In English, supra, this court reversed a portion of an FTCA award on the ground that the district court had failed to discount a deceased's projected earnings to present value. See 521 F.2d at 72. We found that the failure to discount gave the widow more money than she could have expected from her spouse's future earnings had the accident not occurred. Id. at 76. English did not specify, however, whether discounting was required as a matter of state law or supervening federal policy. We noted that California law, which applied in other respects, considers the effect of inflation and interest rates on damage awards, but we also mentioned two other policy concerns which influenced our decision. Id. at 74-75. Recently we resolved this question, stating that in English we were applying the law of California. Hollinger, 651 F.2d at 641-42. 18 The Supreme Court of Washington has held that in that state an award for pecuniary damages should be discounted to present worth. 3 Hinzman, 501 P.2d at 1234, citing Warner v. McCaughan, 77 Wash.2d 178, 460 P.2d 272 (1969). We have referred to at least three acceptable methods for determining the appropriate discount rate. The first, the independent incorporation method, requires inflation of the entire lump sum award by the compounded rate of inflation, and then application of the discount rate to the inflated sum. See Hollinger, 651 F.2d at 642. The second approach, the offset method, requires that the inflation rate be subtracted from the discount rate, to achieve the real interest rate, which is then applied to the lump sum. See Alma v. Manufacturer's Hanover Trust Co., 684 F.2d 622, 626 n. 2 (9th Cir.1982). The third technique involves application of a set formula which assumes a constant relationship between the two rates. Id. All three methods require independent and adequate proof of each factor before the inflation and discount rates can be compared. Id. at 626-27. The choice among the methods is left to the trial judge, who must explain the approach he adopted. See Jones & Laughlin Steel Corp. v. Pfeiffer, 462 U.S. 523, 103 S.Ct. 2541, 2556, 76 L.Ed.2d 768 (1983). Once he chooses a rate, he should apply it to each of the estimated annual installments, and then add up the discounted installments to compute the award. Id. 103 S.Ct. at 2551. 19 Based on these standards, the district court here erred in at least three respects. First, it omitted to indicate its choice among the approved approaches for discounting awards. Second, it offered no explanation of its estimates of future inflation and interest rates. Third, once the court arrived at a 1% discount rate, it simply deducted 1% from the total pecuniary damages, instead of making deductions from each annual installment. 4 In light of these mistakes, we are required to remand the pecuniary award for subsidiary findings and recomputation. 5 20