Business Liability and Economic Damages, Second Edition by Scott D. Gilbert

Author:Scott D. Gilbert [Scott D. Gilbert]
Language: eng
Format: epub
Publisher: Business Expert Press
Published: 2020-06-24T16:00:00+00:00

A Taxing Matter

Rules of evidence can affect the estimation of economic damages in some surprising ways. For instance, in lost profit cases like Example 4.2, the court often interprets profit to be after-tax, a simple reason being that profits are usually taxed, so any loss of actual profit is likely on an after-tax basis. Since the difference between profit before and after tax can be substantial, with after-tax profit sometimes being 70 percent or less of before-tax profit, the issue of tax adjustment can be a big deal.

On the other hand, for a personal injury case like Example 3.3 where a person suffers a physical injury and loses wages because of it, courts typically interpret earnings loss on a before-tax basis. A possible rationale here is that the U.S. federal government does not ordinarily tax economic damage awards received by people as compensation for their personal physical injuries,12 granting a sort of windfall to the injured party, and a like-minded court may grant the same windfall. The granting of a windfall may be an act of mercy to people who have sustained wrongful physical injuries and are using the economic damage proceeds to recover their lives and livelihoods. A good chunk of such proceeds, between 30 and 40 percent, is typically paid to the injured party’s lawyers, leaving a much reduced sum which taxation would further reduce—substantially if the damage award is substantial.13 The windfall itself is exceptional, as a person’s income or wage is ordinarily taxable.14

The windfall granted to personal injury plaintiffs may mean that a business pays more when found liable for a certain amount of economic harm if that harm is caused by physical injury to a person rather than by some other means—such as business interruption, contract violation, or property rights infringement. There is another distinction of this sort, in terms of present value and discounting. While future lost profits in a case like Example 4.2 are typically brought to present value using a discount rate that reflects the risk of business activity and profit, future lost labor earnings—or front pay—for a person physically injured are typically brought to present value using a lower discount rate—for a low-risk investment. The effect of this contrast in discount rates is to increase economic damages in a personal injury case relative to those in a commercial case—lost profit and so on.

The rationale for using a relatively low discount rate on future labor earnings is perhaps twofold. First, labor earnings tend to be more stable over time than business profit, and so do not need as much discounting for risk. Second, the court may desire that the physically injured party have the opportunity to enjoy a stable and predictable income based on safe investments, to aid in their recovery, even if their actual labor earnings were not so predictable.15

If there are two advantages granted to personal injury plaintiffs, in terms of tax treatment and future loss discounting, there is one disadvantage, namely that any losses of past earnings are usually

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