Opinion ID: 729764
Heading Depth: 3
Heading Rank: 2

Heading: Tax Benefits of EPI's Losses

Text: 79 MHC also sought compensation for certain EPI losses totalling $3.6 million. Baxter used these losses to reduce its 1989 federal tax liability by $1,362,371. MHC argued that Baxter gained this tax benefit as a result of its wrongful control over EPI after September 30, 1986. MHC requested an award of $2,275,929--an amount that MHC claims will leave it with a $1,362,371 gain after paying taxes on the award. 80 The district court found that MHC was entitled to $1,362,371 on the tax benefit claim less Baxter's $244,726 net cash loss as a result of owning EPI after September 30, 1986. The net award was $1,117,645. The court stated that this was an equitable award because it prevented Baxter's unjust enrichment and avoided undue speculation as to what would have occurred had EPI been transferred in 1986. The court also balanced the fact that the award might make MHC more than whole (because MHC had failed to show that use of the $3.6 million in EPI losses since 1986 would have translated into a tax benefit to MHC) against the fact that the court had diminished the award to reflect Baxter's losses. 81 MHC claims that the district court erred in its award. MHC argues that it is entitled to an award of $2,275,929 to reflect the taxes it will have to pay on the award. As a general matter, a court will not increase an award of damages to compensate for the expected tax liability on the damage award. Oddi v. Ayco Corp., 947 F.2d 257, 267 (7th Cir. 1991). We have noted, however, that courts have adopted a pragmatic approach to the award of damages where the defendant's error deprived the plaintiff of tax-free income, rather than taxable income. Id. MHC claims that the issue is the after-tax effect of Baxter's failure to transfer EPI to MHC. Thus, the proper measure of damages takes the after-tax effect of the judgment into account. In the instant case, MHC claims that the $2,275,929 figure is appropriate because it will result in an after-tax benefit to MHC of $1,362,371 and an after-tax loss for Baxter of $1,362,371. 82 We give great deference to the district court in exercising its equitable discretion. The district court concluded that compensating for tax effects was inappropriate and speculative. In Oddi, we noted that the party seeking an increase in an award to reflect tax effects bears the burden of presenting evidence that shows that he will be liable for the prescribed amount of taxes. Id. at 268. We cannot say that the district court abused its discretion in refusing to increase the damage award to reflect potential tax effects. 83 After noting the very deferential standard of review in contesting MHC's argument, Baxter argues that the district court's accounting was flawed because it awarded too much to MHC. Baxter argues that $2,753,076 of the EPI tax losses claimed by Baxter after September 30, 1986, occurred and were in existence prior to that date. Baxter did not do a balance sheet review of EPI in accordance with GAAP prior to the sale of Medcom to MHC because Baxter did not meet the terms of the SPA. Baxter claims that if it had conducted a balance sheet review as the SPA required, then $2,753,076 of the $3,612,772 in EPI tax losses claimed by MHC necessarily would have been taken by Baxter prior to closing. The district court rejected this reasoning, noting that to guess what Baxter would have done had Baxter met the terms of a contract that Baxter violated is unwarranted speculation. Moreover, it is clear that Baxter did indeed receive a tax benefit from its wrongful ownership of EPI after September 30, 1986. (MEMORANDUM OPINION AND ORDER, 10/10/95, 1995 WL 609125 at  6.) 84 When considering the equities of the situation, the district court was entitled to refuse to credit Baxter's speculation as to what it would have done if it had not violated the contract. In addition, the court was not required to speculate as to what effect a proper balance sheet review would have had on MHC's decision making process. The district court did not abuse its discretion.