Court Opinion

ID: 9844226
Source: CourtListenerOpinion
Date Created: 2023-09-24 02:59:11.519337+00
Date Added: 2024-06-11T09:15:30.182832
License: Public Domain

Chief Justice ROYIRA
delivered the Opinion of the Court.
We granted certiorari to decide whether depreciation deducted from a self-employed claimant’s gross earnings as reported on his federal income tax return should be included in the calculation of his post-injury average weekly wage for determining the amount of temporary partial disability benefits to which he is entitled. We conclude that reasonable depreciation deductions should be included in calculating those benefits. Thus, we reverse and remand with directions the unpublished opinion of the court of appeals in Elliott v. Industrial Claim Appeals Office, No. 92CA0347 (Colo.App. Sept. 10, 1992).
I
On March 24, 1986, Gerald Elliott (“claimant”) injured his back in the course *1364and scope of his employment with El Paso County (“respondent”). As a result of this injury, claimant was awarded workmen’s compensation benefits 1 and received temporary total disability benefits from March 25, 1986, through April 11, 1986, at the weekly rate of $171.81. Because respondent could not find a position available which claimant was capable of performing, he did not resume his employment with respondent following his injury. Rather, he began his own business as a dump truck operator and maintained this business from 1986 through 1990.
In January 1990, claimant filed a petition to reopen his workmen’s compensation claim alleging fraud, mistake and worsening of condition.2 After a hearing, the Administrative Law Judge (“ALJ”) ordered claimant’s case reopened based on medical evidence establishing that his condition had worsened. The AU determined that respondent should pay claimant temporary partial disability benefits from February 2, 1990 to the present at a rate of $174.98 per week. This amount was calculated first by taking claimant’s average weekly wage earned while employed with respondent ($311.80) and subtracting from that amount claimant’s post-injury earnings from his trucking business as disclosed on his 1990 federal income tax return. The AU determined his post-injury earnings by taking his gross profit of $7,175 and subtracting the claimed depreciation of $4,610. Thus, the AU concluded that claimant’s post-injury annual income for 1990 was $2,565 or, $49.32 per week. The AU then subtracted $49.32 from his average weekly income earned while employed with respondent which resulted in a difference of $262.48. The AU then awarded claimant two-thirds of that amount in temporary partial disability benefits (i.e., $174.98 per week).3
Respondent filed a petition for review on the grounds that it was improper to consider claimant’s depreciation deduction taken on his 1990 tax return in calculating his average weekly income for 1990. The AU, relying on Fireplace Equipment v. Petruska, 796 P.2d 75 (Colo.App.1990), agreed and issued a supplemental order on October 22, 1991, revising her calculation of temporary partial disability benefits. The supplemental order set claimant’s post-injury average weekly wage at $137.98 based on his gross earnings of $7,175 divided by fifty-two weeks. Subtracting that amount from his $311.80 pre-injury average weekly wage and multiplying that amount by two-thirds, the AU concluded that claimant was entitled to $115.88 per week in benefits.
Claimant appealed the supplemental order to the Industrial Claim Appeals Panel (“ICAP”) which affirmed. He then appealed the ICAP’s decision to the court of appeals. The court of appeals affirmed stating: “Our court has previously ruled that depreciation is not deductible from earnings in computing a claimant’s average weekly wage. Fireplace Equipment v. Petruska_ We are not persuaded by claimant’s argument that Petrusha was erroneously decided or that it is inapplicable here.” Slip op. at 2.
II
Section 8-51-103, 3B C.R.S. (1986), of the workmen’s compensation act provided that “[i]n case of temporary partial disability, the employee shall receive sixty-six and two-thirds percent of the impairment of his earning capacity during the continuance thereof_” Earning capacity is calculat*1365ed, in part, by assessing the average weekly wage earned by the claimant during the period of temporary partial disability. Under section 8-47-101(4), 3B C.R.S. (1986), when the enumerated methods for calculating a claimant’s average weekly wage
will not fairly compute the average weekly wage, the division, in each particular case, may compute the average weekly wage of said employee in such other manner and by such other methods as will, in the opinion of the director based upon the facts present, fairly determine such employee’s average weekly wage.
As this provision makes clear, the determination of a claimant’s average weekly wage must be fair so as to compensate the claimant for actual loss of earnings. See Romero v. U-Let-Us Skycap Services, Inc., 740 P.2d 1004 (Colo.App.1987).
Respondent argues that allowing for depreciation in determining a claimant’s post-injury income results in a figure that “is not reflective of his actual earnings.” Thus, depreciation should not be included in determining the amount of that income when calculating temporary partial disability benefits. See Broussard v. Zim’s Alignment Serv., Inc., 488 So.2d 395, 396 (La.App.1986) (“The sum of money not taxed by the government because of an allowance for depreciation of machinery or equipment is merely used to induce the investor to continue in his business and does not accurately reflect his profits or losses.”). Consequently, respondent concludes that Petrusha was properly decided and is controlling here. We disagree with the first contention and accordingly, reject the second.
A
Contrary to respondent’s assertion, the depreciation allowed under the federal income tax code, see I.R.C. §§ 167-68, does not merely represent “an accounting principle which has been accepted by Congress as a means by which individuals who are self-employed may reduce their taxes.” Nor is depreciation simply “an arbitrary factor intended to encourage the general economy within the scheme of taxation.” Petrusha, 796 P.2d at 76. Rather, the allowance for depreciation deductions is a method by which a capital expenditure for long-lived business property may be recovered over a period of time, as opposed to being recovered in a single year as a business expense. Thus,
depreciation serves essentially the same function as the deduction for such business expenses as wages, rent, interest, and property taxes, except that the allowance is not deductible in a single year but is instead spread out over a number of years.
Boris I. Bittker & Martin J. McMahon, Jr., Federal Income Taxation of Individuals 12.1 at 12-3 (1988).
The expense of purchasing a dump truck is recoverable over a period of time because it is presumed that its useful life is protracted, whereas other expenses are incurred for items, such as gasoline, that are presumed to be consumed at once. See Michael D. Rose & John C. Chommie, Federal Income Taxation §§ 3.22, at 157 (3d ed. 1988) (“In theory, the purpose of the depreciation is [a] deduction to distribute in a systematic and rational manner the cost of property.”). Compare I.R.C. §§ 167-68 with I.R.C. § 179. Consequently, depreciation deductions serve essentially the same function as deductions for other business expenses; the difference being the accounting method used in arriving at the appropriate figure for decreasing one’s gross income. As such, “[t]he deduction simply protects taxpayers against overstating their profits.” Boris I. Bittker & Martin J. McMahon, Jr., Federal Income Taxation of Individuals 12.1 at 12-3 (1988).
Because reasonable depreciation deductions are necessary to accurately determine the appropriate amount of income of those who are self-employed, it follows that such deductions should be taken into account *1366when determining the amount of a claimant’s post-injury average weekly wage for purposes of awarding benefits under the workmen’s compensation act. In short, the cost of earnings must be considered in measuring those earnings. This is the conclusion reached by the majority of courts which have addressed the question of whether depreciation deductions should be considered in determining the proper amount of benefits to be awarded as workers’ compensation. See, e.g., Backaus v. Murphy Motor Freight Lines, 442 N.W.2d 326, 327 (Minn.1989) (“computation of the employee’s wage must include some recognition of the return on employee’s capital investment”); D & C Express, Inc. v. Sperry, 450 N.W.2d 842 (Iowa 1990) (holding depreciation to be one factor used in determination of taxable income for purposes of calculating average weekly wage from self-employment); Florida Timber Products v. Williams, 459 So.2d 422, 423 (Fla.App. 1 Dist.1984) (reasonable depreciation attributable to claimant’s equipment was a proper business expense to be deducted from claimant’s gross receipts in determining his average weekly wage); Baldwin v. Piedmont Woodyards, 58 N.C.App. 602, 293 S.E.2d 814, 815-16 (1982) (though depreciation allowed by the Internal Revenue Service may not coincide precisely with actual depreciation, it must be deducted from self-employed claimant’s gross earnings); Nortrim, Inc. v. Workmen’s Compensation Appeal Bd., 150 Pa.Cmwlth. 196, 615 A.2d 873, 875-76 (1992) (depreciation should be deducted from gross earnings when calculating average weekly wage for workers’ compensation benefits). See also Licor v. Washington Metro. Area Transit Auth., 879 F.2d 901 (D.C.Cir.1989), and 2 Arthur Larson, Workmen’s Compensation Law § 60.12(e) (1992). We are of the opinion that this authority properly construes the nature of depreciation deductions and their relationship to a self-employed claimant’s average weekly income.
Therefore, we reject the holding of Pe-trus ka and the primary authority relied on in rendering that decision — Broussard v. Zim’s Alignment Service, Inc., 488 So.2d 395, 396 (La.App.1986) (depreciation is nothing more than a means of inducing the continuance of one’s business). We elect to follow the majority rule which requires that depreciation be considered in determining the amount of temporary partial disability benefits to which a claimant is entitled to receive. To the extent that Petrus-ka is inconsistent with this conclusion, it is overruled.
B
In reaching this conclusion, we do not establish a per se rule of depreciation deduction for the simple reason that it would be manifestly unjust to require, in all circumstances, that any depreciation deduction taken on a claimant’s income tax return be considered in computing post-injury average weekly wage. The amount of a depreciation deduction must bear some logical relationship to a self-employed claimant’s actual diminution in earnings as a result of capital expenditures. Consequently, we hold that only a reasonable depreciation deduction should be considered in calculating a claimant’s post-injury average weekly wage. Moreover, because the claimant bears the burden of showing the statutory entitlement to compensation by a preponderance of the evidence, Olson v. Erickson, 105 Colo. 489, 99 P.2d 199 (1940), Wierman v. Tunnell, 108 Colo. 544, 120 P.2d 638 (1941), the burden of establishing the reasonableness of depreciation deductions for purposes of workers’ compensation benefits also must rest with the claimant.4
*1367In the present case, the AU initially awarded claimant $174.98 per week in benefits based on his 1990 federal income tax return. That return shows that claimant took total depreciation deductions of $4,610. No evidence was presented, however, which established what that depreciation deduction was for, nor was any evidence presented concerning the reasonableness of subtracting that deduction in full from claimant’s gross income for 1990. Consequently, the AU must reconsider her award of workmen’s compensation benefits in light of the legal standards set forth above and claimant must show, by a preponderance of the evidence, the depreciation deductions which reasonably should be included in calculating his benefits.
C
For the foregoing reasons, we reverse the court of appeals decision and remand the case to that court with instructions to return to the Industrial Claim Appeals Office for remand to the AU to recompute the amount of workmen’s compensation benefits to which claimant is entitled in conformity with the opinions expressed herein.
ERICKSON, J., concurs in part and dissents in part, and SCOTT, J., joins in the concurrence and dissent.

.See Workmen's Compensation Act of Colorado, §§ 8-40-101 to -54-127, 3B C.R.S. (1986). The Act was repealed and reenacted by the General Assembly in 1990. The retitled Act, now known as the "Workers’ Compensation Act of Colorado,” is codified at §§ 8-40-101 to -47-209, 3B C.R.S. (1993 Supp.). Since claimant filed his claim while the pre-1990 version of the Act was in effect, all citations herein will refer to the Workmen’s Compensation Act of Colorado.

. See § 8-53-113, 3B C.R.S. (1986).

. See § 8-51-103, 3B C.R.S. (1986).

. Such a showing does not require a claimant to justify the accounting methods prescribed by the federal government for income tax purposes. To the contrary, it merely requires a claimant to show that any claimed depreciation deductions in fact conform to those methods. In the event that a claimant declared depreciation deductions to which he was not entitled under the federal income tax laws, it would be inequitable to allow such deductions to be used in diminishing a claimant's post-injury average *1367weekly wage and, correspondingly, increase the amount of workers’ compensation benefits awarded. Thus, a claimant need only show that claimed depreciation deductions are allowable under the income tax laws in order to carry his burden of proving that those deductions are reasonable. Moreover, because the possibility of error or fraud may arise, an employer is free to present evidence to rebut any showing that such deductions are reasonable.