Indiana Law Review


Computation of Lost Future Earnings in

Personal Injury and Wrongful Death Actions

The computation of lost future earnings has created a great deal
of confusion and led to inconsistent holdings in both federal and

state courts, but few jurisdictions have taken a less definitive posi-

tion than Indiana. The purpose of this Note is to discuss the cases in
which Indiana has dealt with four interrelated issues concerning the

type of evidence admissible in computing lost future earnings in per-

sonal injury and wrongful death actions, as well as those cases

decided by the federal courts and other state courts. The four issues
to be discussed are as follows: (1) To what extent may expert
testimony of future inflationary trends be used in the computation

of lost future earnings? (2) To what extent may expert testimony as
to probable increased productivity be used in the computation of

lost future earnings? (3) May a jury be instructed that every award
made to a party in a personal injury or wrongful death action for
lost future earnings will not be subject to federal taxation? (4) May
evidence of the impact of income taxes on future earnings be in-

troduced to decrease any award for lost future earnings? The first
two issues are often dealt with interchangeably by the courts.
Therefore, they will be discussed together in this Note with distinc-
tions being drawn whenever possible. Similarly, the third and fourth
issues raising evidentiary questions relating to the impact of the tax

laws on future awards will be discussed together as they raise com-
parable problems.

As a final matter, it is critical to an intelligible discussion of the
issues in this Note to understand the basic system of damages in
this country. Damages in wrongful death and personal injury litiga-
tion are based upon the theory of pecuniary reparation. The objec-
tive is to place the injured person in the same position, as nearly as
possible with a monetary award, as he or she should have been in
had the wrong not occurred.^ This Note will explore how this system
of damages is affected by the four factors to be discussed.

I. Inflationary and productivity Factors

A. Introduction

Professors Harper and James suggest that the confusion sur-
rounding awards of present damages for future loss is insoluble
where there is a lump sum recovery.

Future trends in the value of money are necessarily

'See G. Parmele. Damage Verdicts, § 2 at 37-38 (1927); see also Chesapeake &
0. Ry. V. Kelly, 241 U.S. 485 (1916).



648 INDIANA LAW REVIEW [Vol. 11:647

unknown and so always render such damages speculative in
a way we cannot escape. If the estimates represent a
straight-line projection of present living costs, they will be

frustrated by fluctuations either way. If prophecy of change

is heeded, frustration will follow if no change, or the op-

posite change, occurs. When courts have consciously grappl-
ed with the problem they have either found all prophecy too

speculative and so, perforce, have taken the equally

speculative course of betting on a continuance of the status

quo; or they have made intuitive and not always very wise
judgments that present conditions represent a departure

from some imaginary norm to which they think we shall
rapidly return.^

The courts often compound the problem by confusing inflation
with productivity factors and by using the terms "inflation,"

"growth factor," "earnings increase factor," or "economic trends" to

include both concepts of economic growth. To an economist, inflation
is the percentage of rate of increase in the price level. "Productivi-

ty," on the other hand, depends on the industry a person is in. To
ascertain the increase in productivity, the economist must assess
"the contribution to wages that will derive for attendant increases
in technologies peculiar to that industry."^ Bascially, productivity ap-

pears to be a factor based on a worker's increased skill and output

as he gains experience at a particular job and also the current im-

provements in technology which increase his output." This Note will

make distinctions whenever possible.

The United States Supreme Court has ostensively dealt with
these factors in Grunenthal v. Long Island Railroad,^ but the deci-
sion has not provided useful guidelines for lower courts. In Grunen-

thal, the Court upheld a damage award in an FELA case based upon
projections of increased wage growth. The Court quoted the trial
judge's conclusion that the plaintiff had presented "convincing

testimony not refuted . . . demonstrating the steady wage increases
in recent time for work equivalent to that rendered by plaintiff, and
the strong likelihood that similar increases would continue."* This
language does not elucidate whether the court was referring to in-
flation, productivity or both. As a result, the case has created confu-

II. F. Harper & F. James, the Law of Torts. 1325-26 (1956).
'Rail, How to Prepare the Economic Evaluation Report, Trial, April 1977, at 49.
*See Rail, supra note 3, at 47-53. See also Huddell v. Levin, 395 F. Supp. 64. 84

n.20 (1975); Hoffman v. Sterling Drug, Inc.. 374 F. Supp. 850, 853 (M.D. Pa. 1974).
•393 U.S. 156 (1968).

'Id. at 160.



1978] LOST FUTURE EARNINGS 649

sion in the lower courts and has not been followed.^ Furthermore,

the case has been distinguished on the grounds that Grunenthal in-

volved the question of whether a federal court had abused its discre-

tion in approving the award as found by the jury, thus the issue as

to the prejudicial nature of the testimony on future inflation was not
raised.* The Supreme Court's opinion in Grunenthal is indicative of
the confusion generated by these issues in other jurisdictions.

B. Indiana

Indiana has no reported decisions dealing directly with the ad-

missibility of expert testimony and the use of inflationary and pro-

ductivity factors in the computation of lost future earnings.

However, there are several reported decisions in Indiana that in-

dicate at least a tacit recognition of evidence of this type.

In King's Indiana Billiard Co. v. Winters,^ the court of appeals

upheld an award that the appellants contended was excessive,
stating:

The jury in assessing damages for loss of earnings is not
limited to the amount being earned by the plaintiff at the ex-
act time of his injury but may fairly compensate the plaintiff
for such loss of earnings as he actually has and will sustain. ...

And, furthermore, the court on appeal will consider the

diminished purchasing power of the dollar at the time the
verdict is rendered.^"

However, there was no evidence from the opinion that any
testimony as to future economic trends had been offered. Also, while

many reviewing courts have used judicial notice of inflation in justi-

'One recent example is Henderson v. S.C. Loveland Co., 396 F. Supp. 658 (N.D.
Fla. 1975), in which the court referring to the above quote, stated:

While not clear from the decision, that evidence may not have been tied to
inflation. In the case before this court, allowance was, of course, based on in-

flation. As appears from it's decision, there was no evidence before it of prior
increases for work equivalent to that performed by plaintiff other than cost
of living increases. Penrod and other recent Fifth Circuit decisions, though
neither mentioning nor distinguishing Grunenthal, come several years after
it. Without undertaking further to reconcile these decisions, if they need
reconciliation, this court is constrained to follow, and will follow, the
categorical statement of these recent decisions of the Fifth Circuit that the
effect of future inflation is not to be considered in calculating future

damages.

Id at 660.

'See Raines v. New York R.R., 129 111. App. 2d 294, 263 N.E.2d 895 (1970), rev'd
on other grounds, 51 111. 2d 428. 283 N.E.2d 230, cert, denied, 409 U.S. 983 (1972).

'123 Ind. App. 110. 106 N.E.2d 713 (1952).

"/d at 124-25, 106 N.E.2d at 719.



650 INDIANA LAW REVIEW [Vol. 11:647

fying an award claimed to be excessive, this question is distinct
from the question of whether the jury should be allowed to consider

the effects of possible future inflationary trends."

In a more recent case, State v. Daley,^^ the court of appeals
upheld the lower court's award based largely upon the uncon-
troverted testimony of an expert economist who had used an ex-
pected five percent wage increase factor in his computation of lost
future earnings. Noting that the jury had apparently accepted the

economist's projections as an accurate and fair calculation of the

decedent's projected future earnings, the court stated: "An
awareness of general inflation and a constant depreciation and

cheapening of money is within the zone of discretion given to the
trier of facts when assessing damages."'^

In a subsequent case, Richmond Gas Corp. v. Reeves,^* the court
of appeals upheld a $250,000 verdict in a wrongful death action

based upon a testimony of an actuary who had used a two percent
annual wage increase factor in computing the projected future earn-
ings of the twenty-six year old decedent. The court again empha-
sized, as it had in Daley, that the jury could consider such factors as

general inflation and the constant depreciation and cheapening of

money when assessing damages.^^
It is significant that the admissibility of expert testimony on

future inflationary trends or increased productivity was not raised
in any of the above actions and that the court of appeals did not, in

fact, decide this issue. Therefore, the results in the above cases may
well be explained as an application of the liberal Indiana rule that

damages will not be deemed excessive on review unless they are
flagrantly outrageous and extravagant.^* Thus, a subsequent case,

which raised the admissibility issue, might well be distinguishable.^'

For this reason, it is necessary to look to other jurisdictions that

"See, e.g., Carol v. United States. 410 F. Supp. 378, 396-97 (D.R.I.), aff'd, 548 F.2d

366 (1st Cir. 1976).

'^53 Ind. App. 330, 287 N.E.2d 552 (1972).

"/d at 337, 287 N.E.2d at 556.

"158 Ind. App. 338, 302 N.E.2d 795 (1973).

''Id. at 369, 302 N.E.2d at 815.

"See State v. Daley, 153 Ind. App. 330, 287 N.E.2d 552 (1972), where the rule was

set out that in order for damages to be ruled excessive on review they "must be so ex-

cessive as to strike mankind, at first blush, as being beyond all measure, unreasonable

and outrageous, and such as manifestly show the jury to have been actuated by pas-

sion, partiality, prejudice, or corruption." Id. at 337, 287 N.E.2d at 556 (quoting

Coleman v. Southwick, 9 Johns 45 (N.Y. Sup. Ct. 1812). See also Richmond Gas Corp.

V. Reeves. 158 Ind. App. 338, 302 N.E.2d 795 (1973).

"For a case making a similar distinction, see Raines v. New York R.R., 129 111.
App. 2d 294. 263 N.E.2d 895, rev'd on other grounds, 51 111. 2d 428. 283 N.E.2d 230.

cert, denied, 409 U.S. 983 (1972).



1978] LOST FUTURE EARNINGS 651

have engaged in an in depth analysis of the factors favoring and op-
posing the use of inflationary and productivity factors in the com-
putation of lost earnings for a more thorough discussion of these fac-
tors.

C. Federal Courts

1. First Circuit. —Although it has never addressed the issues of
inflation and productivity factors separately, the First Circuit has

rejected the admission of any evidence concerning the future trends

of such factors for computations of future losses. The court in
William v. United States^^ refused to increase future earnings by

what it viewed as "some multiple taken out of the thin air in the

name of future inflation."^' The court argued that if evidence of the
effect of future inflationary trends were considered, it would
likewise be necessary to make an adjustment for possibly inflated
expenses as well as earnings, and the court viewed both of these
elements as too speculative. In a later decision, the court stated that

consideration of "economic trends" would require the judge and jury

to "take on the 'joint role of soothsayer and mathematical analyst in

order to foretell what the future held for the deceased.' "^° The most
recent decision from a district court in the First Circuit adopted the

rationale used by the court of appeals in rejecting any evidence con-

cerning future inflationary trends and added the argument that the
plaintiff could place his award in investments that gain a higher
return than the statutory interest rate and thereby reduce any

adverse effects of inflation."

2. Second Circuit. — The Second Circuit has also held that infla-
tion should not be considered in computing lost future earnings. In

"435 F.2d 804 (1st Cir. 1970). Williams was a wrongful death action brought
under the FTCA.

"/d at 807. No reference was made in the opinion as to what, if any, expert
testimony had been presented on the question of future inflation.

"Turcotte v. Ford Motor Co., 494 F.2d 173, 184 (1st Cir. 1974) (citing Romano v.
Duke, 111 R.I. 459, 463, 304 A.2d 47, 51 (1973). Turcotte was an action brought under

the Rhode Island wrongful death statute, which authorized a consideration of economic

trends. Thus, while bound by state law to allow the use of inflationary and productivi-

ty factors, the court did note its general disapproval of such a statute.

"Caron v. United States, 410 F. Supp. 378, 396-97 (D.R.I. 1976). While Caron was
a personal injury action governed by Michigan law, the district court noted that it

found Michigan law on the evidentiary issue no different than the existing law in the

First Circuit. The court also rejected the appellant's contention that prior decisions

permitting the court to take judicial notice of inflation indicated such evidence was ad-

missible. The court stated that such cases stood only for the proposition that the
courts may take notice of rising prices due to past inflation in order to justify large
verdicts against a charge of excessiveness. This is what the language in the Indiana

decisions appears to suggest.



652 INDIANA LAW REVIEW [Vol. 11:647

McWeeney v. New York, New Haven & Hartford R.R.,^^ the Second
Circuit noted in dictum that although "some courts have sanctioned
instructions permitting the jury to take into account inflation bet-

ween the injury and the trial, there is little or no authority in favor
of charging the jury to take future inflation into account."^' The
court thus justified the trial court's refusal to give any instruction

on income taxes, in part on the ground that any windfall to the

plaintiff would be offset by lack of adjustment for inflation. Judge
Lumbard, concurring in part and dissenting in part, added that such
evidence is too speculative and that any plaintiff receiving a large

amount could invest the award in a manner that would give him
some protection against both inflation and deflation.^^ However, the
court of appeals did indicate in a subsequent case that it felt the

courts might have to reconsider the propriety of receiving evidence

on inflation if inflation should continue at its present pace.^^

Nevertheless, two recent cases based on Connecticut law per-
mitted extensive expert testimony on the question of inflation. In

Perry v. Allegheny Airlines, Inc.,^^ the plaintiffs expert economist
was permitted to use estimates of prospective future earnings
testified to by the decedent's employer and to make "certain
assumptions concerning future rates of inflation and interest" in ar-

riving at the net economic loss for future earnings.^^ The opinion did
not specify what these assumptions were or upon what they were
based.

The Connecticut District Court was later faced with the con-
verse of the question of whether the fact finder should consider in-

flation in evaluating the loss of future earning capacity, that being

whether inflation should be considered in setting the interest rate

by which the already assessed dollar amounts for the loss of future
earning capacity were to be discounted to their present value. The
district court approved the use of such an "inflation adjustment" in

setting a discount rate.^*

"282 F.2d 34 (2d Cir.), cert, deniei, 364 U.S. 870 (1960). The court's main focus in
this case was whether the evidence should be limited to plaintiffs net income in an
FELA action.

''Id. at 38.

'*Id. at 42-43 (Lumbard, C.J., dissenting in part & concurring in part).
''^Yodice v. Koninklijke, Nederlandsche Stoomboot Maatschappij, 443 F.2d 76 (2d

Cir. 1971). cert, denied, 411 U.S. 933 (1973).

'M89 F.2d 1349 (2d Cir. 1974).

"Id. at 1351.

''Teldman v. Allegheny Airlines, Inc., 382 F. Supp. 1271 (D. Conn. 1974), aff'd in

part, rev'd and remanded on other grounds, 524 F.2d 384 (2d Cir. 1975). The district
court had relied on an economic expert's calculation in which the expert had used

average earnings of 4.14% as representative of a prudent, non-sophisticated invest-

ment and subtracted 2.87% as the yearly inflation rate, yielding a 1.27% difference,
which was rounded up to 1.5%.



1978] LOST FUTURE EARNINGS 653

However, the court of appeals, in affirming the district court's

decision, made it clear that the case should not be considered a
precedent for cases arising under federal law, stating: "As a matter

of federal law we do not necessarily vouchsafe either the principle
of making an 'inflation adjustment' in setting a discount rate or the

means by which it was done in this instance."^** The court of appeals
avoided an analysis of the reliability and speculativeness of the

evidence provided by the plaintiffs economist by relying on the

state's law giving the court the flexibility to consider inflation. Ap-

parently the court of appeals agreed with the district court that the

Connecticut law requiring discounting to present value for destruc-

tion of future earnings capacity compelled the court to "engage in

economic forecasting despite the inexactitude of the dismal science's

soothsaying."^" Finally, another factor in the willingness of the court

in both decisions to permit the inflation adjustment was the require-
ment under Connecticut law that future income taxes be deducted
from any award.^^ Thus, the converse of the argument previously us-
ed in McWeeney was not available to the court in Feldman. It
therefore appears that although the two recent cases based on Con-
necticut law seem to indicate more of a readiness to accept evidence
incorporating inflationary and productivity factors, the Second Cir-

cuit's present position as expressed in McWeeney is that such
evidence is too speculative.*^

3. Third Circuit -The Third Circuit's Position, while not totally
clear, appears to be that evidence of inflationary trends and increased
productivity may only be admitted after a strict foundation has been
laid to insure as much reliability in such projections as pos-
sible. The Third Circuit has also exhibited more of a readiness to ac-
cept evidence as to productivity increases than as to inflationary
trends. In Magill v. Westinghouse Electric CorpJ^ the court re-
jected an actuary's computations that incorporated an "earnings in-
crease factor," stating that "the lack of foundation for the earnings

=^524 F.2d at 387.
'°382 F. Supp. at 1293 n.30.

"The court of appeals noted that it felt the district court had appropriately
hypothesized the Connecticut Supreme Court's favorable reaction to discount rate ad-
justment, "since Connecticut, unlike most jurisdictions, reduces what would otherwise
be inflated judgments for wrongful death injuries by requiring deduction of income
taxes payable on future earnings." 524 F.2d at 387.

'''This conclusion is supported by Judge Friendly's concurring opinion in Feldman,
where, after pointing out that utilization of an inflation rate in determining the dis-
count rate gives nearly the same result as does first considering inflationary effects on
future income and then discounting to present value, he expressed his concern that
such method poses the problem of potential speculativeness in calculating damages Id
at 390-93.

'^464 F.2d 294 (3d Cir. 1972).



654 INDIANA LAW REVIEW [Vol. 11:647

increase factor was a fatal defect."'* In dicta, the court did indicate a
greater willingness to accept evidence of productivity factors as op-

posed to inflationary factors, noting that it considered evidence of

promotions or pay raises as a proper foundation upon which to

gauge an increase in future earnings.'^

A somewhat stronger case rejecting the use of inflationary
trends as too speculative was Frankel v. United States.^^ In re-
jecting the offered evidence of inflationary trends, the court

specifically criticized the use of an unusual time period by the plain-

tiffs expert in making his projections. Furthermore, the court in-
dicated that the government's present attempts to control inflation

and the fact that any award could be invested so as to offset the ef-
fects of inflation were factors weighing against admissibility." The
court's criticism at least impliedly indicates that such evidence

might have been permitted if a proper foundation had been laid.'*

This conclusion is further supported in a subsequent court of ap-

peals decision, Hoffman v. Sterling Drug, Inc.,^^ in which the court
rejected evidence offered by the plaintiffs expert as too conjectural.

In Hoffman, no evidence was introduced in the case as to the pro-
bablility or magnitude of future inflationary trends. The court
specifically criticized the economic expert's attempt to isolate a five

year period of extreme inflation as the basis for a projection over

twenty-six years without introducing any evidence to support such a

projection."

On remand after the Third Circuit's decision, the plaintiff
argued that the court of appeals in Magill and the present case had

found error in admitting testimony based on such a brief span of

time and that they should not be precluded from introducing

evidence of economic trends from a twenty year time span.''^ The
court first noted that the confusion that existed in this area was

'Vd at 300.

'^However, the court specifically noted that the concept of inflation and the

declining value of the dollar had almost been universally rejected as providing support

for the earnings increase factor. Also central to the court's holding was the fact that
the expert used was only an actuary and the method of calculations used was one used
by accountants for a somewhat different purpose. Id. at 300-01.

='321 F. Supp. 1331 (E.D. Pa. 1970). aff'd. sub nom., Frankel v. Heym, 466 F.2d
1226 (3d Cir. 1972). In Frankel the district court noted that inflationary considerations

had been used in the justification of an award by considering present inflationary
trends as compared to awards in the past, but they had not been used to project
future earnings.

"The plaintiffs expert had used the decade of the 1960's, one of the more infla-
tionary times in the history of our country, as the basis for his projection. Id. at 1346.

''See also Griffin v. United States, 500 F.2d 1059, 1070 (3d Cir. 1974).
'»485 F.2d 132, 144 (3d Cir. 1973).

'"/d. at 143-44.

*'374 F. Supp. 850, 853 (M.D. Pa. 1974).



1978] LOST FUTURE EARNINGS 655

partially due to an imprecision of terms used, acknowledging that

often the expressions "earnings increase factor" and "economic

trends" are incorrectly used interchangeably by the courts. The

former actually constitutes merit raises predicted over the plaintiffs

life expectancy, while the latter reflects economic trends separate

from the individual's employment situation.

The district judge indicated that the trial court error in the

original Hoffman trial and in Magill was not the court's refusal to

allow evidence on future economic trends "but rather our admission

into the record of an earnings increase factor based on insufficient

evidence. A close reading of Magill bears this out. Judge Adams'
opinion in Magill carefully distinguishes between future earning

power and future inflation."" On remand, the trial court rejected the

defendant's argument that Frankel precluded all evidence on

economic trends in computing loss of future earnings and stated that

despite the difficulties involved the earnings increase factor of a

particular plaintiff must be separated from future economic trends.

Thus, the court would allow the plaintiff to present evidence to the

jury as to the earnings increase factor but would not allow into

evidence any testimony as to future economic trends, regardless of

the foundation laid for it."

However, a recent decision by another district court in the
Third Circuit, Huddell v. Levin,** interprets Magill and Hoffman as
standing merely for the proposition that a proper foundation must
be laid to support the expert's opinion by showing specific evidence

of long-range inflationary trends and wage increases in a particular
job. The court rejected the defendant's argument that Hoffman and
Magill prohibited the admission of testimony based upon growth
rates while permitting the jury to consider future growth of earning
capacity. In distinguishing Huddell from Magill and Hoffman, the
court stated that it interpreted the two cases to mean merely that
there must be competent evidence of probable future salary or
economic trends, and evidence alone that growth had occurred in
the past was not sufficient for this purpose. Thus, while Magill and
Hoffman had disallowed the expert testimony for, in essence, not
laying a proper foundation, the expert used in Huddell gave "the
jury substantial evidentiary support for an award of damages based
upon future growth of earnings. A more highly qualified expert in

"/d. at 854.

"M at 855.
"395 F. Supp. 64, 83-84 (D.N.J. 1975), remanded on other grounds, 537 F.2d 726

(3d Cir. 1976) (quoting Hoffman v. Sterling Drug, Inc., 485 F.2d 132, 144 (3d Cir. 1973)).

Huddell was a wrongful death action brought under New Jersey law in which the
court upheld an award based on expert testimony using a six percent "growth rate"

factor, which was made up of a three percent inflation factor and a three percent stan-

dard of living increase.



656 INDIANA LAW REVIEW [Vol. 11:647

this field could not have been produced."*^ The two most recent
district court decisions from the Third Circuit have concurred with

the district court's interpretation in Huddell of the decisions in

Magill and Hoffman, stating: "[B]oth cases imply clearly that future

increases in earnings is a proper matter for the jury so long as

there is sufficient competent evidence of 'probable future salary

trends or economic trends.'
"*®

It. Fourth Circuit — 'Y\ie Fourth Circuit has not dealt directly
with the issues under consideration, but a district court did consider

them in Scruggs v. Chesapeake & Ohio Railway." The court per-
mitted the use of evidence regarding inflationary and productivity

factors, stating that such factors were clearly relevant to the ques-
tion of lost future earnings. The court reasoned that since inflation
is a universally discussed topic, the jury was likely to consider
whether there was testimony directed to the issue or not.
Therefore, it was proper to admit expert testimony to guide the
jury, since they would take it into account in any event.** The
district court concluded that inflation and productivity factors are

relevant evidence and are no more speculative than other factors us-
ed to determine future damages.

5. Fifth Circuit —The Fifth Circuit has considered the issue
more often than any other circuit. It has rejected the use of produc-
tivity and inflationary factors as too speculative. However, there has
been some indication in dicta that the court may accept evidence as
to increased productivity provided a strict foundation is first laid to

insure the reliability of such evidence. In Johnson v. Penrod Drilling

*^Id. at 83-84. The court of appeals, when remanding, did quote with approval a
recent New Jersey decision, Tenore v. Nu Car Carriers, Inc., 67 N.J. 466, 481-84, 341
A.2d 613, 621-23 (1975), in which the New Jersey court had indicated that so long as
the plaintiff had an opportunity to offer expert testimony to give the jury informed

guidelines in their deliberations, such evidenced was no more conjectural than other

evidence often introduced to the jury. Furthermore, consideration of well informed

estimates of future inflationary trends would lead to fairer damage awards. Id. at
83-84.

*Thomas v. American Cystoscope Makers, Inc., 414 F. Supp. 255, 270 (E.D. Pa.
1976) (quoting Hoffman v. Sterling Drug, Inc., 485 F.2d 132, 144 (3d Cir. 1973)). See also

Vizzini v. Ford Motor Co., 72 F.R.D. 132 (E.D. Pa. 1976).
"320 F. Supp. 1248, 1250-51 (W.D. Va. 1970). Scruggs was an action brought by

the widow of a deceased employee in which an economic expert had testified that he
had projected a five percent wage increase each year based on a two percent produc-
tivity increase and a three percent inflationary increase.

''Id, at 1250-51. See also Plant v. Simmons Co., 321 F. Supp. 735 (D. Md. 1970).
The only other cases found in the Fourth Circuit were Scheel v. Conboy, 551 F.2d 41,
43 (4th Cir. 1977), and Whalen v. Marini, 542 F.2d 1170 (4th Cir. 1976). In both cases,
the court merely rejected any testimony by economic experts on future economic loss

because of the speculativeness of determining in each case whether any future

economic loss had in fact occurred.



1978] LOST FUTURE EARNINGS 657

Co.,*'^ the Fifth Circuit, en banc, rejected the use of expert testimony

by an economist on the question of inflation. The court took judicial

notice that inflationary conditions had existed for a number of years,
but concluded that inflation was not a predictable condition for the

future. In reaching this conclusion, the court considered two factors.

First, past increases in inflation do not necessarily foretell future in-

flationary trends but could as easily lead to a recession. Second, the

government has launched strong counter measures aimed at curbing

inflation.*" The court also pointed out that inflation is accompanied

by high interest rates, which could compensate for failure to com-

pute an inflationary surcharge in wage rate calculations." To sup-
port its conclusion, the court cited Professors Harper and James'

treatise on torts.*^

Finally, the court intimated that the admission of testimony on

future trends would open the door to other similarly speculative and

debatable offsets, such as possible future taxes or future deflation.*^

In conclusion, the court stated: "We expressly disapprove the
district court's attempt to take into account, in computing the plain-

tiffs' future lost earnings, inflationary trends in this nation's

economy for the next several decades."*^ The Johnson decision has
been followed by a multitude of Fifth Circuit decisions,** including

its most recent decision in Higginbotham v. Mobil Oil Corp.^^ The

*»510 F.2d 234, 235-41 (5th Cir. 1975). In Johnson the plaintiffs economist pro-

jected an annual wage of 4.8% and the defendant's expert had countered that such a

figure was too high, and that it was impossible to predict inflationary trends accurate-

ly.

"Judicial notice was also taken of price controls temporarily instituted in 1971

and current legislative advocacy of tax rebates as a means of counteracting a contem-
poraneous business recession in support of the proposition that, since government

policies might intervene at any time to change or control the direction of the economy.

The assumption of inflation over the next 34 year period was totally speculative.
"510 F.2d at 236.

"'M at 239. See note 2 supra and accompanying text.

''SIO F.2d at 241-42 (citing McWeeney v. New York, N.H. & H. Ry., 282 F.2d 34
(2d Cir.), cert denied, 364 U.S. 870 (1960) & Sleeman v. Chesapeake & 0. Ry., 414 F.2d
305 (6th Cir. 1969)).

"510 F.2d at 241.

"See David v. Hill Eng'r Inc., 549 F.2d 314, 331-35 (5th Cir. 1977) (also specifically

disallowing productivity factor as too speculative); Matter of S/S Helena, 529 F.2d 744,

753 (5th Cir. 1976); Lacaze v. Olendorff, 526 F.2d 1213, 1222 (5th Cir. 1976); Petition of

M/V Elaine Jones, 513 F.2d 911, 912 (5th Cir. 1975); Standefer v. United States, 511
F.2d 101, 107 (5th Cir. 1975); Robertson v. Douglas Steamship Co., 510 F.2d 829, 839

(5th Cir. 1975); Consolidated Mach., Inc. v. Protein Prod. Corp., 428 F. Supp. 209. 227

(M.D. Fla. 1976); Henderson v. S. C. Loveland Co., 396 F. Supp. 658, 662 (N.D. Fla.

1975). Cf. Law v. Sea Drilling Co., 510 F.2d 242, 251 (5th Cir. 1975) (recognizing Penrod
but applying pre-Penrod law).

"545 F.2d 422, 433-34 (5th Cir. 1977).



658 INDIANA LAW REVIEW [Vol. 11:647

plaintiffs expert economist used a five percent annual straight-line

estimated salary increase to calculate the probable future earnings

of the decedent." On appeal, the defendant argued that the five per-
cent straight-line annual increase amounted to a hidden inflation-
based award. Plaintiff contended that such a figure represented

awards in recognition of performance and experience. In reversing
and remanding the case to the district court to give the plaintiff an

opportunity to prove her damages for loss of her husband's future
earnings, the court set out the following standard:

We believe that Johnson v. Penrod Drilling Co. and its
progeny likewise stand for the proposition that courts may
not simply assume that projected wage increases — whether
calculated from the decedent's past earning experience or by

some other means — would have been granted solely in
"recognition of performance and experience." To the con-
trary, to recover at all for future raises plaintiff must bear
the difficult burden of proving what portion of the increases
would have been given other than as an automatic hedge
against inflation.^*

While the opinion clearly implies that evidence of increased produc-

tivity may be allowed, the court concludes with the cautioning state-
ment: "It remains, of course, within the trial judge's discretion to re-

ject any testimony concerning future wage increases as too specu-
lative . . . ."^»

6. Sixth Circuit. — Although early Sixth Circuit decisions flatly
rejected the use of inflationary or productivity factors as too

speculative, recent decisions indicate a trend toward allowing the

jury to consider future inflation under certain circumstances. The
outstanding case in this area is Sleeman v. Chesapeake Railway
Co.,^° an FELA injury case. The district judge did not discount
Sleeman's award for future earning capacity, because an economist
had testified in other cases in his court that there was "jurisdiction
for offset of discount to present worth of future earnings by increased

"The economist had arrived at the five percent figure by calculating the annual

percentage increases in the decendent's salary from the time he began working for his

employer until death. Id. at 435.

"545 F.2d at 434-35.

"/d. at 435. Justice Godbold dissented, criticizing the court's original decision in

Johnson and stating that where evidence of past wage increases are introduced a court

should clearly be entitled to conclude that the pattern of past earnings increases is of

sufficient duration and uniformity to be a reliable basis for an inference with respect

to the future, despite the fact it may embrace in that pattern certain cost of living in-
crements. Id. at 437.

~414 F.2d 305, 307-08 (6th Cir. 1969).

(



1978] LOST FUTURE EARNINGS 659

earning and appreciation factors."*' The court of appeals found that

the district court's decision lacked evidentiary support. The court
recognized that the economic history of the nation since the 1930's

would appear to make the exclusion of such factors somewhat unfair
to the plaintiff, but suggested that the inflation versus deflation

debate, which has raged inconclusively at the highest levels of

government, was unlikely to be resolved in one personal injury trial.

As a result, the court of appeals would not allow the trial courts of
its circuit to explore such unresolved speculative issues.'^

In a recent Sixth Circuit decision. Bach v. Penn Central
Transportation Co.,^^ the court modified its position in Sleeman. The
court indicated that the district court was correct in rejecting
specific testimony offered by plaintiffs economic expert** as being

too speculative to be admissible. However, the court of appeals held

that the trial court had committed reversible error in instructing

the jury that it could not consider the effect of inflation based on

the jurors' knowledge of it. In rejecting the economist's evidence,

the court stated:

In recent history inflation has been so persistent that it

is difficult to conceive that the purchasing power of the
dollar might remain constant through the year 2000. On the
other hand, the predictive abilities of economists have not

advanced so far that they can forecast with any certainty

the existence and rate of inflation for the next thirty years.

Limited use of economists and other experts may be ap-
propriate in some cases to show that raises in income or pro-
motions would most probably occur.*^

"Sleeman v. Chesapeake & 0. Ry.. 290 F. Supp. 817, 829 (W.D. Mich. 1967).
**414 F.2d at 308. The court also cited with approval the same passages from

Harper & James that had been cited by the Fifth Circuit in Johnson. See note 2 supra
and accompanying text.

In a later decision, Willmore v. Hertz Corp., 437 F.2d 357, 360 (6th Cir. 1971), the
court modified its position somewhat when it found the appellant's reliance on Sleeman
with references to future fluctuation in purchasing power was misplaced, as the court
was applying state law. The court noted that the discussion in Sleeman of the con-
sideration of current economic trends in awarding future damages was actually dictum,
because the reversal resulted from the district court's failure to reduce future
damages to their present worth. However, there was no indication in the Willmore
opinion that expert testimony was actually offered. See also Petition of United States
Steel, 436 F.2d 1256, 1280 (6th Cir. 1970), cert, denied, 402 U.S. 987, rehearing denied,

403 U.S. 924, 940 (1971).

"502 F.2d 1117, 1122 (6th Cir. 1974).

"The economist had projected the exact income the decedent would have received
through the year 2002 based on his knowledge of the railroad industry and estimates
of future inflation. Id. at 1122.



660 INDIANA LAW REVIEW [Vol. 11:647

The language quoted above implies that evidence as to productivity
increases might well be allowed.

The opinion contained even stronger dicta indicating that the
court might accept a more generalized exposition of the economic
factors involved in computing future cost earnings:

We do not hold, however, that the jury may never con-
sider inflation and future increases in income in determining

damages. ... If a jury is not permitted to consider decreases

in the purchasing power of money, appellant would be
woefully damaged if inflation should continue at its present
or at any other substantial rate. . . . The court's role is to
keep such extrapolations within reasonable bounds and in-

sure they conform to evidence. . . .

. . . Inflation is a fact of life within the common ex-
perience of all jurors. Admittedly, if the jury considers this

issue without expert testimony, their calculations will be

even more imprecise.*'

This language, though dicta, would suggest that the Sixth Circuit
may be moving away from its position in Sleeman. After its decision
in Bach, the Sixth Circuit may allow the jury to consider future in-
flation based on either the jurors' own knowledge or on general in-
formation supplied by an economist, so long as the economist's
evidence is not in the form of precise computations of damages set
forth by economic analysis.

7. Seventh Circuit —The Seventh Circuit has never directly
addressed the question of whether expert testimony would be allowed
concerning the use of inflationary and productivity factors in the
computation of future lost earnings. However, in Wetherbee v.
Elgin, Joliet & Eastern Railroad,^'' the court of appeals did express
concern regarding the increasing size of personal injury awards:

The way the amounts awarded in verdicts in personal in-
jury cases have been rapidly increasing is a matter of con-
cern to all who are interested in a fair and orderly ad-
ministration of justice. . . . Even allowing for the decreased
purchasing power of the dollar, many of the recent large
awards for damages are not justified.®^

"191 F.2d 302 (7th Cir. 1951).

'*IcL at 309. The reference to allowing for decreased purchasing power of the
dollar refers to the use of comparison of past awards with present awards to deter-

mine if such award is excessive and has no bearing on the question of whether infla-

tionary and productivity factors may be considered in computing lost future earnings.
See Frankel v. United States, 321 F. Supp. 1331, 1345-46 (E.D. Pa. 1970), affd, 466 F.2d

1226 (3d Cir. 1972).



1978] LOST FUTURE EARNINGS 661

This would indicate that the court would not be anxious to approve

any new methods of computations that would encourage juries to
return even higher verdicts.

8. Eighth Circuit —The Eighth Circuit has essentially adopted
the same position followed by the Sixth Circuit. Thus, while the use
of specific evidence is rejected as too speculative, the use of

evidence of productivity increases is permitted if a proper founda-

tion is provided. The Eighth Circuit has also shown a willingness to
allow the jury to consider the dollar's diminished or increased pur-

chasing power. The court first addressed the issue in Riha v. Jasper
Blackburn Corp.,^^ a diversity action brought under Nebraska law.
After quoting extensively from the Sixth Circuit's opinion in Bach v.
Penn Central Transportation Co.,'"^ the court concluded that even
under the more liberal approach suggested by Bach, the evidence of
future inflation was too speculative to be admitted under both
federal and Nebraska law." In Johnson v. Serra,''^ a diversity action
brought under Minnesota law, the court cited Bach again in holding
that the lower court had abused its discretion in allowing the plain-

tiffs expert to testify using computations that provided for an an-

nual wage increase.^' The court noted that such evidence was too
conjectural and speculative and therefore lacked sufficient probative

value to outweigh the danger that it would lead the jury to assess

damages on an improper basis. Furthermore, the court indicated
that it viewed inflationary forecasts of economists as only personal

opinions of the meaning of past trends, which may well be faulty in-
dicators of the future.^^

The court went on to point out that nearly all federal courts
dealing with federally created claims, such as FELA or Jones Act
cases, have rejected testimony, jury instructions, or trial court con-

sideration of any kind of future inflationary trends in damage
assessments, while some state courts, or federal courts applying
state laws, have permitted consideration of inflation. The court con-
cluded its discussion of the question with the following statement:

In sum. Dr. Foster's testimony in the instant case, as

that in the Bach case, lacked sufficient evidentiary founda-

"516 F.2d 840 (8th Cir. 1975). In Riha, the plaintiffs expert had used a 4.4% infla-
tionary factor and a 7% annual wage increase factor in his computations. But see
Beanland v. Rock Island & P. R.R., 480 F.2d 109, 117 (8th Cir. 1973) (Bright, J., concur-
ring).

'"502 F.2d 1117. 1122 (6th Cir. 1974).

"516 F.2d at 845.

"521 F.2d 1289 (8th Cir. 1975).

"/d. at 1293. The expert had taken the average wage increases for teamsters
since 1947 (a 5.6% increase) and used the annual yield on conservative investments
(4.1%) to yield a differential of 1.5% in his computation.

''Id. at 1294.



662 INDIANA LAW REVIEW [Vol. 11:647

tion— as projections of distant future inflationary trends in-
evitably must. His testimony on future inflationary projec-

tions to the year 2002 should, therefore, have been excluded

as speculative and the excessive verdict obviously derived

from it must be reduced or, in the alternative, a new trial
granted.^^

9. Ninth Circuit. —Two recent decisions by the Ninth Circuit
clearly indicate that expert testimony on changing economic trends

is admissable where a proper foundation is laid. In United States v.
English,''^ a wrongful death action under California law, the court of

appeals found that the trial court had erred in not reducing the

award to present value, but in dictum approved the admissability of
expert testimony on the effect of inflation on future damages. While

recognizing it was controlled by California law, the court of appeals
stated it would be compelled to reach the same result under federal
law for several policy reasons. First, the court acknowledged that it
is somewhat speculative to attempt to forecast future inflationary
trends, but the court suggested that most predictions about future
income are equally suspect. The court reasoned that since it is more
likely that there will be changes in the value of the dollar than not,

it is better to try to predict these changes than to ignore them
altogether. Second, the court recognized that many of the cases in
other districts originally rejecting the use of evidence pertaining to

inflation awards were decided at a time when inflation was not con-
sidered as such an integral part of our economic lives. Thus, to
ignore inflation was viewed to be the same as predicting it would
not occur, or that its effect would be de minimis. Although recogniz-
ing that the administrative convenience of ignoring inflation has

some appeal when inflation rates are low, the court stated that "to
ignore inflation when the rates are high is to ignore economic reali-

''M at 1296-97 (citations omitted) (emphasis added). While Riha and Serra appear

to adequately express the Eighth Circuit's view on the question of admissibility of

evidence as to future inflationary trends, notice should be taken of two subsequent

cases allowing such evidence. In Raney v. Honeywell, Inc., 540 F.2d 932 (8th Cir. 1976),

a case decided under Iowa law, the court upheld an award based on computations

made by plaintiffs expert that relied upon an inflationary rate and a discount rate of
six percent to cancel each other out. The court distinguished Raney from Riha and
Serra, noting that they both had been based on state laws that did not permit such

evidence, whereas Iowa law permitted evidence of inflation to be considered by the

jury in determining the diminution in the plaintiffs earning capacity. The other case

was Morrow v. Greyhound Lines, Inc., 541 F.2d 713 (8th Cir. 1976), in which an award
based on expert testimony on inflation was affirmed because the appellant failed to

make any objection on that ground to the admissibility of the testimony at the trial
court.

"521 F.2d 63 (9th Cir. 1975).



1978] LOST FUTURE EARNINGS 663

ty."" The court concluded on a cautionary note, making it clear that
juries could not use inflation as an excuse not to reduce an award to
present value. Furthermore, the court added that consideration of

inflation was proper only where sound and substantial economic
evidence is offered to support any estimates on the future purchas-

ing power of the dollar.^*

The court put what had been dicta into practice in Burlington
Northern, Inc. v. Boxberger,''^ although no reference was made to
the prior decision. The court held that it was within the trial court's
discretion to determine whether the expert's sources of information

were sufficiently reliable to warrant reception of the opinion and

that under the circumstances presently before the court, the

expert's testimony clearly did not reach the level of the "rampant

speculation" they had condemned in previous decisions.*" The court
also noted that the asserted defects in the expert's assumptions

were questions for the jury, and the defendant had been protected

by competent cross-examination.

10. Tenth Circuit. — The Tenth Circuit, in perhaps one of the
most complete reviews of recent cases dealing with the questions

under discussion, adopted the position of the Ninth Circuit, permit-

ting evidence of inflationary and productivity factors to be admitted

"M at 75.
"The court specifically stated:
By today's holding that the trier of facts in awarding damages may take into
consideration estimated changes in the purchasing power of money, we do
not mean to imply that the lower court may use our holding as an excuse not
to discount an award to its net present value. In other words, the court may
not assume that the discount rate and the inflation rate will net to zero. The
lower court must first estimate future income and expenses, taking into ac-

count estimated changes in the purchasing power of the dollar, and then dis-

count this future net income stream to its present value. Nor do we intend to
have our holding of today read as authorizing the court to arbitrarily draw
an estimate of inflation out of thin air. As with any other element of
damages, we must require the estimate of future inflation to be supported by
competent evidence. The court is to be especially wary of the pitfalls
signposted by the court in Bach, which are inherent in making predictions

about the future of economic conditions. By our holding we allow the trier of
fact in awarding damages to take into account only such estimates of future

changes in the purchasing power of money as are based on sound and
substantial economic evidence, and can be postulated with some reliability.

Id. at 75-76 (citations omitted).

"529 F.2d 284 (9th Cir. 1975). Boxberger was an FELA case arising under Oregon
law in which the plaintiffs had computed lost future earnings based on the assumption
that a 4.8% compound annual increase in railroad employee's earnings over the next
34 years would occur. The expert's estimate was based upon government data on the
average earnings of railroad engineers.

"Id. at 287.



664 INDIANA LAW REVIEW [Vol. 11:647

upon the laying of a proper foundation.*^ In Steckler v. United

States,^^ an action brought under the Federal Torts Claim Act, the

trial court had heard testimony by plaintiffs economist as to a

future inflationary factor of 9.5%.*^ Nevertheless, the court rejected

the plaintiffs contention that there should be an increase in the

award based on the anticipated inflation, concluding that an award
reflecting the effect of inflation on future earning capacity would be

improper as too speculative. The court of appeals, while noting that
the lower court was justified in rejecting the 9.5% inflation factor,
stated that it was not justified in altogether rejecting the evidence
of an infaltionary trend. Although the court acknowledged that the

majority of courts do require a reduction to present value in

calculating damages for future benefits lost and at the same time do
not allow the effects of inflation on future benefits to be considered,

the court stated that this position was inconsistent and often
criticized. The court reviewed the various recent decisions and con-
cluded that it would follow the approach of the Ninth Circuit.** Thus,

the Tenth Circuit will consider evidence of inflationary trends in

conjunction with the problem of discounting the ultimate inflated

sum so as to reduce it to its present value.

"However, in a decision from a district court in the Tenth Circuit, DeWeese v.
United States, 419 F. Supp. 170 (D. Colo. 1976), which was rendered before the Fourth
Circuit had an opportunity to consider the issue, Judge Winner presented one of the

strongest and most vehement arguments against the use of an inflationary factor in

the computation of lost future earnings. Judge Winner stated that he was unconvinced

anyone could foretell economic conditions 45 years down the road, noting the 45 years
ago the United States was at the bottom of the Great Depression, that in 1931 a
transcontinental telephone call cost about $20 and one could mail 4,000 letters for the

same amount, whereas today such a call could be made for $1.50, but only 155 letters
could be mailed for $20. After acknowledging that much of the uncertainty in this area
was the result of cases confusing inflation and reasonable job progression he con-

cluded:

The divergent views create a quagmire ... I think that inflationary trends
and predictions espoused by "econometrists" testifying as advocates have no

place in a lawsuit. The award of damages in a wrongful death or personal in-
jury case is an approximation at best, and testimony confidently predicting

economic conditions many years in the future is more likely to be wide of the
mark than it is to approximate justice. Of course, the long range price trend
has been on the upside historically, but where it is going in the future is

anyone's guess.

Id. at 174-75.

"549 F.2d 1372 (10th Cir. 1977).

•"The 9.5% factor did not include any factor for proficiency increases or promo-

tions.

**In remanding, the court indicated that the trial court should determine a

reasonable annual percentage rate for computing probable wage inflation from the
evidence, suggesting that the Bureau of Labor Statistics Reports would be a reliable

rough guide for the trial court's consideration of a reasonable inflation rate.



1978] LOST FUTURE EARNINGS 665

D. State Courts

1. State Courts Not Allowing Consideration of Economic
Trends.— The state courts that have addressed the question of the
admissibility of expert testimony dealing with inflationary and pro-

ductivity factors in computing future lost earnings have more readily
accepted such testimony than the federal courts. Perhaps the most
often cited state decision disallowing such testimony is Raines v.

New York Central Railroad.^^ The court in Raines had allowed the
plaintiffs expert to testify to the jury as to past economic trends,

describing inflation, the increase in prices and wages, and the

devaluation of the purchasing power of the dollar. On direct ex-
amination, the expert witness also testified that in his opinion the

inflationary spiral would continue to affect the price level by ap-

proximately two to four percent. The plaintiff argued on appeal that
such testimony was permissible based on previous Illinois decisions
that held that a reviewing court would take judicial notice of the

decline in purchasing power of money in considering an issue of ex-
cessive damages. The appellate court rejected this argument on the
grounds these cases were easily distinguishable and did not justify
permitting a jury to consider the effect of possible future infla-

tionary trends. However, the Illinois Supreme Court later reversed
the appeallate court decision, stating that before evidence of future

inflationary trends may even by considered as erroneous, the
reviewing court must determine that the verdict is not supported by
other evidence.*' Thus, the Illinois Supreme Court, without reaching
the propriety of the admission of evidence concerning inflation, held

that there was other proper evidence sufficient to support the
verdict."

One other recent case representative of state court decisions find-
ing error in admitting evidence of inflationary or productivity fac-

tors is Havens v. Tonner.^^ The plaintiffs expert in the lower court
had computed the plaintiffs lost future earnings based on a 3.5%
"productivity factor." In reversing the judgment the court stated:

Steadily rising wage rates over the next twenty years,
whatever the cause, are simply one face of the coin of infla-

tion. It may be that inflation will become so much an
established pattern of our economy that it should be
recognized in estimating loss of future earnings. Certainly,

'•129 111. App. 2d 294, 263 N.E.2d 895 (1970), rev'd, 51 111. 2d 428. 283 N.E.2d 230

(1972).

••51 111. 2d 428, 283 N.E.2d 230, cert, denied, 409 U.S. 903 (1972).

"See also Kapeladi v. Alton & S. R.R., 36 111. App. 3d 37, 343 N.E.2d 207 (1976).
••243 Pa. Super. Ct. 371, 365 A.2d 1271 (1976).

«



666 INDIANA LAW REVIEW [Vol. 11:647

the erratic behavior of the economy over the past half dozen
years, plagued by war and other unusual circumstances, is

not a sufficient demonstration that inflation at any predic-

table rate will continue for another twenty years. Further-

more, even if inflation is a part of the pattern of the future,

one certain consequence is that interest rates on money will
reflect that fact. Consequently, a sum representing the pre-
sent worth of future earnings will earn more in dollars in an
inflationary period than would otherwise be the case. This

may not wholly compensate for the effect of inflation but it
is a closer and more certain approximation than any assump-
tion of a certain rate of inflation over the next twenty years.

We view the "productivity factor" as simply a substitute for
inflation and equally speculative and inadmissible in a

calculation of future earnings.**

Other recent state cases prohibiting testimony of future inflationary

trends follow basically the same reasoning.'"
2. State Courts Allowing Consideration of Economic

Trends. — A somewhat novel approach among these states taking in-
to consideration the effect of inflationary and productivity factors is

Beaulieu v. Elliotf^ in which the Alaska Supreme Court held the
rate of depreciation in the value of the dollar, attributable to on-

going inflation, approximately offsets the financial windfall other-

wise attributable to a failure to discount to present value. The court
suggested that such procedure was also justified by possible future
wage increases.'^

Federal courts and other state courts allowing evidence of

future inflationary trends follow basically the same line of reason-

ing.*^ There have also been a number of state courts specifically ap-

'•/d at 378, 365 A.2d at 1274.

•"See Freeman v. Lanning Corp., 61 Mich. App. 527. 233 N.W.2d 68 (1975);
Mississippi Power & Light Co. v. Shepard, 285 So. 2d 725 (Miss. 1973); Atwood v.
Lever. 274 So. 2d 146 (Miss. 1973); Segebart v. Gregory. 160 Neb. 64. 69 N.W.2d 315
(1955). But see Hampton v. State Highway Comm'n. 209 Kan. 565, 498 P.2d 236 (1972);
Washington v. American Community Stores Corp., 196 Neb. 624, 244 N.W.2d 286
(1976); Zaninovich v. American Airlines, Inc., 26 App. Div. 2d 155. 271 N.Y.S.2d 866
(1966).

•'434 P.2d 665 (Alaska 1967).

"See also State v. Guinn. 555 P.2d 530 (Alaska 1976).
"See Loetzerich v. Texas Pac.-Mo. Pac. Terminal R.R.. 325 So. 2d 626 (La. Ct.

App. 1976); Morgan v. Liberty Mutual Ins. Co.. 323 So. 2d 855 (La. Ct. App. 1975);
Lumber Terminals, Inc. v. Nowakowski, 36 Md. App. 82, 373 A.2d 282 (1977) (excellent
discussion of recent state decisions); Rafferty v. Weimer 36 Md. App. 98. 373 A.2d 64
(1977); Tenore v. Nu Car Carriers. Inc.. 67 N.J. 466. 341 A.2d 613 (1975); Williams v.
General Motors Corp., 501 S.W.2d 930 (Tex. Ct. App. 1973); Hinzman v. Palmanteer, 81



1978] LOST FUTURE EARNINGS 667

proving the introduction of expert testimony on both increased

future inflation and productivity.'*

II. Income Taxes

A. Introduction

Awards received by settlement or verdict in death actions or
personal injury actions are not taxable under the federal income tax

laws.'^ This has led to controversy in almost every state and federal

court as to the proper consideration to be given taxes in computing

damage awards. Professors Harper and James have noted: "With
anything as sure as 'death and taxes,' the courts are avoiding their

responsibilities when they decline to make the best guess they can,
once all the reasonably available evidence has been brought before

them,"^ The majority of legal commentators clearly advocate that
evidence of the amount of federal income tax that a plaintiff would
pay on probable future earnings should be taken into account in

computing the damage award.'^ However, the majority view of the
courts has been that it is reversible error even to inform a jury that

a plaintiffs award is not taxable. Consequently, very few courts
have allowed the portion of the award representing compensation
for loss of future earnings to be reduced by an amount the plaintiff
would have been required to pay as income taxes had the plaintiff
received that sum is income over the future years.

The propriety of instructing the jury that any awards made to
the plaintiff will not be subject to federal income tax (based on the

idea that such an instruction is to prevent a jury from adding to an
award an amount it erroneously believes the plaintiff will be called
upon to pay for income taxes) is a distinct and separate issue from
that of whether evidence of the impact of such taxes may be shown
to reduce the amount of the award. However, these two issues are
often raised in the same case, and occassionally the courts will er-
roneously fail to distinguish them.'* Therefore, these two issues will

Wash. 2d 327, 501 P.2d 1228 (1972) (but see strong dissent against award of loss of

value of future earnings capacity); Sadler v. Wagner, 5 Wash. App. 77, 486 P.2d 330

(1971).

"See Schnebly v. Baker, 217 N.W.2d 708 (Iowa 1974); Coco v. Winston Indus.,

Inc., 341 So. 2d 332 (La. 1976); Resner v. Northern Pac. Ry., 161 Mont. 177, 505 P.2d 86

(1973) (but see dissent); Turrietta v. Wyche, 54 N.M. 5. 212 P.2d 1041 (1949); Wilson v.

Wylie, 86 N.M. 9, 518 P.2d 1213 (Ct. App. 1974); Ploud v. Southern Pac. Transp. Co.,

266 Or. 666, 513 P.2d 1140 (1973), affd on rehearing, 272 Or. 35, 534 P.2d 965 (1975).

•»LR.C. § 104(a)(2).

"Harper & James, supra note 2, § 25.12 at 1327.
"See, e.g.. Harper & James, supra note 2, § 25.12 at 1326-27; Morris & Nord-

strom, Personal Injury Recovery and the Federal Income Tajces Law, 46 ABA J. 274
(1960).

••See, e.g., Highshew v. Kushto, 235 Ind. 505, 134 N.E.2d 555 (1956).



668 INDIANA LAW REVIEW [Vol. 11:647

be treated together in this Note. Some cases have distinguished or
limited the application of their opinions on the tax issues to

wrongful death cases, while others have spoken in general terms

that apply to both personal injury actions and wrongful death ac-

tions.

B. Indiana

The law in Indiana on both issues dealing with the nontaxability
of awards is as uncertain and confusing as it is on the questions of

the use of ini^ationary and productivity factors. In Highshew v.
Kushto,^ the court of appeals reviewed a judgment for the plaintiff
in a personal injury case in which the trial court had refused to give

cautionary instruction concerning the non-taxability of the award:

If given, the cautionary instruction would have informed

the jury that in the event they found for the plaintiff any

award made to him would not be subject to federal income
taxes. Such an instruction has been approved by the courts

of Missouri and we can find no reason for the disapproval of
the one here involved. It is obvious, however, that a refusal

to give the instruction could only result in an excessive ver-

dict due to the jury's desire to make the appellee whole
after taxes. The verdict in this case is not excessive and we
are constrained to conclude that any error involved in the

refusal to give instruction in question was harmless.^°°

However, the Indiana Supreme Court, in denying a petition to
transfer,'"' expressly disapproved the language emphasized in the

above quotation. The court concluded that cautionary instructions
such as those suggested by the court of appeals would raise col-

lateral issues and require intricate instructions on tax and non-tax

liabilities. As a result, no court would be able to properly instruct a
jury without a tax expert at its side.'"^

The Indiana Supreme Court's decision in Highshew has been
cited by a number of other courts as an example of an opinion that
fails to recognize the distinction between the evidentiary issues con-
cerning the consideration of the income tax impact on awards and

the question of the propriety of a cautionary instruction concerning

the non-taxability of the award.'"* A recent Indiana Court of Appeals

"126 Ind. App. 584, 131 N.E.2d 652. transfer denied, 235 Ind. 505, 134 N.E.2d 555

(1956).

'"134 Ind. App. at 596, 131 N.E.2d at 657 (citations omitted) (emphasis added).

""235 Ind. 505. 134 N.E.2d 555 (1956).

"»See also Richmond Gas Corp. v. Reeves. 158 Ind. App. 338. 302 N.E.2d 795

(1973).

""See. e.g., Domeracki v. Humble Oil Ref. Co.. 443 F.2d 1245 (3d Cir. 1971).



1978] LOST FUTURE EARNINGS 669

decision diplomatically recognized this failure when it affirmed a
lower court award where a cautionary instruction had been given.
While recognizing that under the Highshew opinion it was improper
to give such an instruction, the court stated:

Clearly, an instruction regarding the income tax conse-

quences of an award of damages can have two meanings. . . .
They were not entitled to an inflated award based upon the
jury's mistaken belief that a portion of the verdict would be

used to pay taxes on the amount recovered. The instruction
given, in conjunction with the other instructions, merely

served to caution the jury to base its award on the evidence,
and not on speculation about tax consequences.'"*

From the language of the above cases it would appear Indiana
would hold that any evidence of the impact of income taxes on

future earnings was inadmissible. However, such language is
arguably dicta since it was raised in an opinion concerning the pro-
priety of a cautionary instruction. Likewise, the opinion indicates no

cautionary instruction would be allowed, although the recent court

of appeals decision implies that such an instruction might be allowed

if the court properly distinguishes the two issues.

C. Federal Courts

1. First Circuit. —While the case law is not entirely clear, the
First Circuit appears to permit the jury to consider the impact of

taxes in those cases where future inflationary trends are considered.
Furthermore, the First Circuit has held that it is not error to refuse

to give a cautionary instruction on the non-taxability of the award,

unless there is some indication in the record that the jury award
was based on the assumption the award was taxable.

The question of whether evidence of future income taxes should
be admitted first arose in Boston & Maine Railroad v. Talbert.^°^ In
the case, the court of appeals excluded the evidence, citing a Second

Circuit decision'"* that had held such deductions to be too conjec-

tural. However, in a recent decision under Rhode Island law, which
expressly authorizes the consideration of inflation and other

economic trends, the court concluded that whatever savings accrued

to the plaintiff by excluding evidence on the "taxation bite" would

be increased by the inflation multiplier."^ As a result, the court of

'"Wickizer v. Medley, 348 N.E.2d 96, 99-100 (Ind. Ct. App. 1976).
^"=360 F.2d 286 (1st Cir. 1966).

""Stokes V. United States, 144 F.2d 82 (2d Cir. 1944). See discussion in text accom-

panying notes 117-18, infra.

'"'Turcotte v. Ford Motor Co.. 494 F.2d 173 (1st Cir. 1974).



670 INDIANA LAW REVIEW [Vol. 11:647

appeals reversed the trial court's decision that failed to make reduc-
tions in projected earnings for federal and state income taxes. The
court pointed out that the forecasting of future inflationary rates

was clearly more speculative than the forecasting of future tax
rates, and it would thus be logically inconsistent to require con-
siderations of future inflation while at the same time disallowing
evidence as to tax savings on the grounds that it was too
speculative to compute future tax rates. ^"^

In its most recent decision on the evidentiary issue, Kennett v.
Delta Airlines, Inc.,^"^ the First Circuit quoted extensively from both

the majority and dissenting opinions in a leading Second Circuit

decision."" The court indicated that it favored the dissenting opi-
nion's argument that such evidence should be considered, but refus-
ed to apply that rule in the case under consideration because no

evidence as to future taxes had been submitted at the trial court

level."^ In Kennett, the First Circuit also discussed the propriety of

an instruction cautioning the jury that the award was not taxable
and upheld the trial court's refusal to give such an instruction. The
court recognized that this was a proper statement of the law, but
argued it would inject an "irrelevant" factor in the jury's determina-

tion of damages. However, the court did note that it would be error
not to give the instruction if it could be demonstrated from the

record that the jury assumed the award was taxable."^
2. Second Circuit. — The Second Circuit has upheld a trial

court's refusal to give a cautionary instruction where there was no
evidence that this affected the jury's award and has suggested that
in certain circumstances the jury may properly consider the tax con-
sequences on future earnings. Both issues were raised in McWeeney
V. New York, New Haven & Hartford Railroad,^^^ one of the most
frequently cited opinions in this area of the law. In McWeeney, the
defendant requested both a cautionary instruction regarding the

""Id. at 184-86. But cf. Caron v. United States, 410 F. Supp. 378 (D.R.I. 1976) (per-

sonal injury case decided under Michigan law in which the court held a recent

Michigan decision foreclosed any argument as to the propriety of taking into considera-

tion the impact of income taxes on a personal injury award).
'»»560 F.2d 456 (1st Cir. 1977).

""McWeeney v. New York, N.H. & H. R.R., 282 F.2d 34, 35-43 (2d Cir.), cert
denied, 364 U.S. 870 (1960).

"'560 F.2d at 463-64.

"Vd. at 461-62. Such a statement by the court seemed inconsistent with the

record, which indicated a strong likelihood that the jury did assume the award was

taxable, as the jury specifically asked the trial court whether they should consider in-

come tax deductions in computing future lost earnings and the court informed them

they should not consider them. The logical conclusion from such an exchange would ap-

pear to be that such an award is taxable. But see id. at 462 n.7.
"'282 F.2d 34 (2d Cir.), cert denied, 364 U.S. 870 (1960).



1978] LOST FUTURE EARNINGS 671

non-taxability of the award and an instruction directing the jury to
calculate any future loss of earnings on the basis of the plaintiffs

net income after deduction of income taxes. The court of appeals af-
firmed the denial of both requests by the trial court.

The court first discussed the instruction concerning the deduc-
tion of taxes and held that the impact of income tax liability should

not be considered in computing the damage award because it would
prove too difficult for the jury. "Practical difficulties," such as

disputes over possible future exemptions resulting from marriage

and newly born children, as well as tax shelters, would make any
result merely speculative."*

The court also noted that if consideration of such a factor were
allowed, there would be an additional problem resulting from the

fact that lost future earnings awards are discounted to present
value to account for the earning power of money. Since interest so
computed would be taxable, another adjustment would have to be
made in the award to add back in the taxes that would be paid on
such interest."^

Arguing in support of the instruction, the defendant contended
that regardless of how difficult the computation would be, the worst
result from giving such an instruction would be better than the best
result from not giving one. The court rejected the defendant's con-
tention based on three justifications. First, it would be too conjec-

tural to determine future tax liability in light of such factors as

changes in the family status of the injured party in years to come,

possible changes in the exemption and deduction provisions of the

tax law, possible changes in the rates of taxation, and so forth. Se-
cond, the use of a net income theory would be too complex and con-
fusing for the jury. And finally, other factors not considered in the
computation, such as inflation and attorneys fees, would tend to
counter-balance any resulting overcompensation."®

The court did, however, modify its position taken earlier in
Stokes V. United States.^" Stokes is often cited for the proposition

that the amount of federal income taxes is too conjectural to be con-
sidered by a jury. In Stokes, the court made no analysis of the ques-
tion, but was content to settle the problem by merely stating that
"such deductions are too conjectural.""* In McWeeney, the court
noted that in cases involving computation of income in higher tax
brackets, where added exemptions or deductions do not greatly af-

"Vd at 36.
"^M at 37.
"•/d at 38.

'"144 F.2d 82 (2d Cir. 1944).

"'/A at 87.



672 INDIANA LAW REVIEW [Vol. 11:647

feet the tax, failure to make some adjustment for the portion of a
plaintiffs or decedent's earnings that would have been taken by in-

come taxes would produce an improper result. The court stated:

In such cases . . . the criticism that the whole process of

computation is unrealistic has a considerable measure of
validity, the projection of future income at such levels being

itself extremely conjectural, and the slope of the tax pro-

gression curve declines although only after having reached

such a high plateau that earnings above it have relatively

slight value."^

Concluding its discussion of the issue by acknowledging that the

practice of refusing the instructions in some cases, but requiring ad-
justments in others, lacked precision and elegance, the court never-

theless left the decision to the trial judge. '^''

The McWeeney court then discussed the refusal of the trial
court to caution the jury as to the non-taxability of the award. The
court concluded there would be no error in giving such an instruc-

tion as it was a correct statement of the law that imposed no new
burdens on the jury and did not require the jury to engage in

speculation. Nevertheless, the court held it was not reversible error
to refuse to give the instruction, stating: "Before an appellate court

should hold that the failure to give such a cautionary instruction

was reversible error, there ought to be evidence either that juries
in general increase recoveries on this account or that the particular

jury did so."^^^

Chief Judge Lumbard wrote an excellent dissent discussing both
issues. Concerning the cautionary instruction, Lumbard argued it
was the duty of the courts to "charge upon those matters regarding
which misinformation by any one juror might lead the jury to give

improper weight to a factor which should not be considered at all."^^^

Taking judicial notice that media coverage of large sums won on
television or in lotteries often pointed out that a large percentage of

the winnings must be paid to the government as income tax, Lum-
bard reasoned that it would only be natural for the layman to con-

clude that the plaintiffs receipts from the judgment would be taxed.

"•282 F.2d at 38-39.

"'See also Blake v. Delaware & H. Ry., 484 F.2d 204 (2d Cir. 1973). But see J.
Lumbard's dissent, id. at 207-08, advocating a re-examination of McWeeney. See also
Petition of Marina Mercante Nicaraguense, S.A., 364 F.2d 118 (2d Cir.), cert denied,
385 U.S. 1005 (1966): Leroy v. Sabena Belgian World Airlines, 344 F.2d 266 (2d Cir.).
cert denied, 382 U.S. 878 (1965) (applying McWeeney exception to a geologist with an
anticipated income of between $16,000 and $25,000).

'"282 F.2d at 39.

"*/d at 40 (Lumbard, C.J., dissenting).



1978] LOST FUTURE EARNINGS 673

This danger, combined with the fact that such a request requires no

calculation or computation and is simple and easily understood, led

Lumbard to conclude that refusal to grant such a request was rever-
sible error.

Lumbard further concluded that an instruction to consider tax
savings should be granted if the defendant produces some evidence

as to what the plaintiff actually paid in the past or as to what taxes

would normally be paid by someone in the plaintiffs position. He
claimed the majority greatly overestimated the difficulties that the

jury would encounter in making such a computation. Furthermore,

Lumbard rejected the majority's contention that such a factor was
too speculative, pointing out that all items of damages listed by the
majority (future normal earning power, expectancy and discount fac-

tor) were sheer speculation as to any plaintiff. Nevertheless, it

would be unfair to omit any one of them merely because they were
speculative. Lumbard noted that "on the facts of this case one thing
is certain and that is that McWeeney never has escaped and never
could expect to escape the payment of income taxes on any money
which he has earned or would earn in the future" and that "[n]othing

can be more certain than that there will be a federal income tax in
the years to come and that it will be substantially what it is now
and what it has been for many years."'^^ Lumbard concluded that
given the fact that a minimum of fifteen to twenty percent of an in-
dividual's gross income is generally paid on taxes it seemed unfair

to deny an instruction as to future income taxes when such an in-
struction is requested and the record contains evidence as to

taxes.'"

3. Third Circuit. —The Third Circuit will allow a cautionary in-
struction when requested, but it will prohibit the introduction of
evidence concerning possible future income taxes to reduce the

award. The court of appeals in Domeracki v. Humble Oil & Refining
Co.^^^ noted that evidence of income taxation was to be excluded, but
held that in personal injury actions the trial court must, upon re-

quest by counsel, give a proper cautionary instruction. The court
stated that the purpose of personal injury compensation is neither

to reward the plaintiff nor punish the defendant but to replace the

plaintiffs losses resulting from the injury. An injured plaintiff loses

'^Id. at 41-42.

'"For an earlier decision decided under Oklahoma law that supports Lumbard's
dissent see O'Connor v. United States, 269 F.2d 578 (2d Cir. 1959). See also Perry v.

Allegheny Airlines Inc., 489 F.2d 1349 (2d Cir. 1974); Feldman v. Allegheny Airlines,
Inc., 382 F. Supp. 1271 (D. Conn. 1974), affd in part, rev'd & remanded on other
grounds, 524 F.2d 384 (2d Cir. 1975).

•«443 F.2d 1245 (3d Cir. 1971).



674 INDIANA LAW REVIEW [Vol. 11:647

only his net or take-home pay and does not in fact "lose" his gross

earnings. While acknowledging that legal commentators generally

advocate the admissibility of such evidence, the court suggested

that "shifting tax rates, together with other variables, could give

rise to great conjecture, at least as to en futuro earnings. Indeed,

the tax computation itself could completely overshadow the basic

issues of liability and damages."^^* Thus, while realizing that such a

practice may result in the plaintiff being overcompensated, the court
chose to follow the majority of jurisdictions in allowing evidence

only of gross earnings. '^^

In discussing the second issue concerning instructions on the

taxability of the award, the court noted that while some courts have
confused the evidentiary issue with the question of a cautionary in-

struction,^^* the issues are distinct. The court pointed out that the
cautionary instruction did not require additional evidence or a tax

expert and would not open the trial to matters irrelevant to tradi-

tional issues in personal injury litigation. Thus, it would in no way
complicate the case or confuse the jury. The court concluded that
the "tax conscious" American juror might well believe that the judg-
ment would be taxable and would increase the verdict to compen-
sate for the imaginary tax. Therefore, the court required the use of

a cautionary instruction in the future if it is requested by counsel.^^

A district court in a recent case, Huddell v. Levin,^^° discussed
the evidentiary issue at length and considered many of the objec-
tions that have been raised regarding evidence offered on future

taxes. The court rejected this evidence on several grounds. First,
the court indicated that the majority of courts clearly prohibited

this type of evidence.

In all but one state, the gross earnings rule is followed.

In twenty-eight states, the question has been specifically

considered. In twenty-seven of those states, the courts have

ruled either that income tax consequences cannot be con-

sidered, or have accepted the majority rule that cautionary

instructions should not be given concerning the non-

taxability of the award. Nor is there any case decided under

'^/d. at 1250.

""It should be noted that such language was dicta, as the issue before the court

was the refusal of the trial court to grant the requested cautionary instruction.
"^The court cited Highshew v. Kushto, 235 Ind. 505, 134 N.E.2d 555 (1966), as an

example of a case confusing the two issues. See text accompanying notes 101-03 supra.

'"See also Vizzini v. Ford Motor Co., 72 F.R.D. 132 (E.D. Pa. 1976), remanded on
other grounds, 569 F.2d 754 (3d Cir. 1977).

'*'395 F. Supp. 64 (D.N.J. 1975), rev'd on other grounds, 537 F.2d 726 (3d Cir.

1976).



1978] LOST FUTURE EARNINGS 675

"federal" law where the jury's consideration of income tax

consequences has been permitted. In non-jury cases decided

under "federal" law, there appears to be only two exceptions

to the majority rule. The only area where authority is even-
ly divided is Federal Tort Claims Act cases, where the

United States as defendant is also the benefactor of the ex-

emption.'^'

Second, the Huddell court viewed the exemption for such

awards found in the tax laws as an expression by Congress of a

desire to give a benefit to victims of tortious conduct. The court
recognized that such awards may have initially been excluded
because of constitutional reservations as to their taxability, but

subsequent cases have established that Congress can constitutional-

ly tax any gain.'^^ Since Congress re-enacted the exemption after

these decisions, the court argued that this indicated that Congress

"intended to relieve a taxpayer who has the misfortune to become ill
or injured."'^^

The court's third rationale was that the "collateral source" doc-
trine found in the law of evidence'^* prohibited consideration of the

intended benefit of the Congressional exemption, as "the incidence

of federal taxation on personal injury awards is a matter solely be-
tween plaintiff and the Government."'*^ The court therefore conclud-

"'/d at 85-86 (footnotes omitted). It should be noted that this quote fails to include

those cases that have allowed the consideration of taxes under the McWeeney Rule,
nor does it note several decisions which state that the evidentiary issue of taxes is not

affected by whether the case is before a jury or judge. See Mosley v. United States,

538 F.2d 555 (4th Cir. 1976); McWeeney v. New York, N.H. & H. R.R., 282 F.2d 34 (2d
Cir. 1960) (Lumbard, C.J., dissenting).

'^See, e.g., Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).
"»395 F. Supp. at 87 (quoting Epmeier v. United States. 199 F.2d 508, 511 (7th Cir.

1952)). Professor Nordstrom has strongly attacked this argument, stating that the Con-

gressional intent argument is merely an example of attributing a non-existent intent to

a legislative act after the fact. In support of this view, he pointed out that such provi-

sion did not appear in our tax laws until 1918, and when it did so its purpose was not

to benefit injured parties but rather it appeared because Congress thought it was

doubtful that tort damages were income within the meaning of the Sixteenth Amend-
ment. Nordstrom, Income Taxes and Personal Injury Awards, 19 Ohio St. L.J. 212

(1958). Nordstrom does not meet the argument raised in Huddell that re-enactment of

the exclusion after the rulings resolving the doubt as to whether tort damages were

income indicates a Congressional intent to benefit the injured party; nor does Huddell

show any indication of such an intent.

"*Under the "collateral source rule," the defendant is not entitled to obtain the

benefit of payments that have come from a collateral source, that is, a source that is

collateral to, or independent of, the defendant. See, e.g., Weiman v. Ippolito, 129 N.J.
Super. 578, 324 A.2d 582 (1974).

i*»395
F. Supp. at 88. Professor Nordstrom likewise points out the faUacy of this

argument and states that, while it is correct that what a plaintiff does with an award



676 INDIANA LAW REVIEW [Vol. 11:647

ed that the jury should be concerned only with plaintiffs total losses

and not with what might have happened to those earnings had he
not been injured. The court thereafter merely reiterated the
arguments raised in McWeeney.

In a recent personal injury action, Varlack v. SWC Caribbean,
Inc.,^^ the Third Circuit rejected the argument that evidence of
taxes on future earnings should be admitted, but failed to make any
reference to the district court's argument in Huddell Instead, the
court relied on the rationale found in McWeeney that such evidence
would be too complex and conjectural.

-4. Fourth Circuit. —HY^e Fourth Circuit has permitted the use

of evidence on income taxes in computing damages in wrongful
death cases but has not otherwise addressed the issues under con-

sideration. However, the district courts of the circuit have applied

the McWeeney Rule to the evidentiary issue in personal injury
cases and have permitted cautionary instructions in both types of

actions.

In Mosley v. United States,^^'' a wrongful death action governed

by North Carolina law, the court of appeals held that evidence of in-

come taxes would be permitted. While noting that the issue had not
been directly addressed by the North Carolina Supreme Court or by
the court of appeals itself, the Fourth Circuit stated: "[W]e are of

the opinion that income taxes are proper deductions in order to ar-

rive at the 'pecuniary injury' retrievable by the estate."'** This case

is one of the few decisions which made a clear distinction be-
tween the admissibility of such evidence in wrongful death actions
and its admissibility in personal injury cases. The court adopted the
rationale previously expressed by the district court in Brooks v.

United States,^^^ which rejected the contention that evidence of

future tax impact was too speculative in wrongful death cases.
While acknowledging that changes in tax deductions (such as in-

creases in dependents) may make it impossible to arrive at a fair
calculation of future tax in personal injury cases, the court sug-

gested that such arguments have little relevance in wrongful death

actions. Both Brooks and Mosley were non-jury cases, but the courts

after receipt is of no concern to the court, it is not correct to assume that the
plaintiffs award is an accurate measure of his loss. His true loss is, rather, his net in-
come. Nordstrom, supra note 133. The Second Circuit in Perry v. Allegheny Airlines,
Inc., 489 F.2d 1349 (2d Cir. 1974), also rejected the argument that the collateral source
rule barred such evidence, noting that the admissibility of evidence regarding income

taxes does not present the general equitable considerations underlying the collateral

source rule.

"550 F.2d 171 (3d Cir. 1977).
"'538 F.2d 555 (4th Cir. 1976).

"*/(i at 558-59 (footnote omitted).

"^73 F. Supp. 619 (D.S.C. 1967).



1978] LOST FUTURE EARNINGS 677

indicated that even a jury could deal with the complexities and con-

fusion involved in admitting such evidence.

In Plant v. Simmons Co.,^*" decided before Mosley, the district
court adopted the McWeeney Rule and prohibited the introduction
of tax evidence. This approach has been modified by the Fourth Cir-

cuit's opinion in Mosley with respect to wrongful death actions.
However, this will most likely be the rule in this circuit as to per-

sonal injury actions. Plant also recognized in dicta that a cautionary

instruction should be given when requested by either side."'
5. Fifth Circuit. — The Fifth Circuit has also adopted the Mc-

Weeney Rule on the evidentiary issue but has chosen not to allow a
cautionary instruction. There does appear to be, however, a substan-

tial dissenting minority on both positions.

In Blue V. Western Railway,^*^ the court of appeals addressed

the evidentiary issue in some depth. In Blue, the plaintiff claimed
the trial court had committed error by instructing the jury to con-

sider and compute only the amount of net wages lost as a result of
the injury. The court of appeals acknowledged that the rationale of
those courts prohibiting the use of evidence of future taxation had

been severely criticized by Harper and James.'*^ Furthermore, the
court indicated that such evidence was no more speculative than
many of the other items that go into prophecies about future losses.
Nevertheless, the court held that evidence of future taxes should

not be allowed except under certain circumstances, quoting the Mc-

Weeney decision in its entirety for support. The court concluded
that the rule enunciated in McWeeney was sound and in harmony
with their prior decisions."*

On the related question of the propriety of a cautionary instruc-
tion, the court noted it had already held in prior decisions that it
was proper for the trial court to refuse such an instruction."^
However, none of the Fifth Circuit decisions discuss the rationale of
these holdings.

The majority's position on both the evidentiary question and the
cautionary instruction has provoked substantial disagreement. In its
most recent decision, Johnson v. Penrod Drilling Co., "* the majority

""321 F. Supp. 735 (D. Md. 1970).

'"/d at 740.

'"469 F.2d 487 (5th Cir. 1972).

^*^See note 96 supra and accompanying text.

'"The court in Blue also distinguished a prior decision, Hartz v. United States,

415 F.2d 259 (5th Cir. 1969), which had allowed future taxes to be considered on the

grounds that Hartz was a non-jury death action brought under the FTCA. Therefore,
Hartz was a suit between an individual and the government, which legislated the tax
break, as opposed to a personal injury action between private parties.

'"See, e.g., Greco v. Seaboard Coast Line R.R., 464 F.2d 496 (5th Cir. 1972).
'"510 F.2d 234 (5th Cir.), cert, denied, 423 U.S. 839 (1975).



678 INDIANA LAW REVIEW [Vol. 11:647

of the Fifth Circuit, en banc, adhered to the McWeeney Rule. Three
of the judges dissented on the income tax issue, noting that by
following McWeeney the court would "open to [the jurors] the gates
of fairyland and direct them to arrive at a take-home earnings figure
. . . which never was and never would have been. This ... is not
logic and should not be law."^*^ The dissent further criticized the ma-
jority's practice of not allowing an instruction to the jury concerning

the non-taxability of the award, noting that such a practice could

result in a double windfall for the plaintiff, first by allowing him to
receive an award based on gross earnings, and second, by allowing a
mistaken jury to add a factor which would never in fact have to be
paid.

6. Sixth Circuit. — The Sixth Circuit has taken a position
similar to the Fourth Circuit. It has adopted the McWeeney Rule on
the evidentiary issue and requires that requested cautionary in-

structions be given. In Petition of the United States Steel Corp.,^*^ a

proceeding involving claims for the death of seamen and injuries to
others under maritime law, the court of appeals rejected any con-

sideration of the impact of income taxes on the computation of lost

future earnings as too speculative, and stated: "[W]e therefore adopt

the [McWeeney Rule] that no adjustment for income tax need be
made 'at the lower or middle reach of the income scale.' "^"

Later, in Bach v. Penn Central Transportation Co.,^^° the court
addressed the propriety of a cautionary instruction. The court
recognized that in a number of previous cases it had held it was not
reversible error to refuse to give such an instruction.^" However,
the court held it was within the trial court's discretion whether to
give such an instruction or not, since such an instruction does not in-

volve speculation or complicated calculations and merely gives the

jurors an accurate statement of the tax law.'^^

7. Seventh Circuit. —While the Seventh Circuit has not ad-
dressed the issue concerning the propriety of a cautionary instruc-

tion, it appears to have adopted the McWeeney Rule on the eviden-
tiary issue. In Wetherbee v. Elgin, Joliet, & Eastern Railway,^^^ a
death action brought under FELA, the defendant had appealed the

'*7d at 242 (Gee, J., dissenting).

>"436 F.2d 1256 (6th Cir. 1970).

'"/d at 1274 (quoting McWeeney, 282 F.2d at 39).
'=«502 F.2d 1117, 1122-23 (6th Cir. 1974).

'"See, e.g., Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479 (6th Cir. 1973); Payne
V. Baltimore & 0. R.R., 309 F.2d 546 (6th Cir.), cert, denied, 374 U.S. 827 (1962).

'='502 F.2d at 1123. Cf. Johnson v. Husky Indus. Inc., 536 F.2d 645, 650 (6th Cir.

1976) (different result under Tennessee law).
'^191 F.2d 302 (7th Cir. 1951), rehearing denied, 204 F.2d 755, cert denied, 346

U.S. 867 (1953).



1978] LOST FUTURE EARNINGS 679

trial court's decision on grounds that the award was excessive. The

defendant contended that the actuary's computation was based on

the false premise that the descendants' loss of future benefits could

be computed on the decendent's probable future gross earnings

rather than his probable contribution for support. The court of ap-

peals, after noting that the actuary's computations had in fact been

based on the decedent's average past gross earnings rather than his

"take-home" pay, concluded that it was error to receive this

testimony over the defendant's objections. This implies that the tax

factor should be taken into account in computing lost future earn-

ings.

The court apparently modified its position somewhat in Cox v.
Northwest Airlines, Inc.,^^ a non-jury action under the Death on

High Seas Act. The trial court failed to reduce the decedent's pro-
jected future earnings by future income taxes. The Seventh Circuit
remanded the decision with directions to modify the damages, adop-
ting the rationale of the Second Circuit in Petition of Marina Mer-
cante Nicaraguense, S.A.^^^ In Marina Mercante, the Second Circuit

stated that the McWeeney Rule should be followed in all cases
where the question is one of federal law or the applicable state law
is silent. Thus, even though Cox was a non-jury wrongful death ac-
tion, its adoption of the rationale of the Second Circuit position in-

dicates that the Seventh Circuit would apply the McWeeney Rule in
both personal injury and wrongful death cases and in both a jury or

non-jury setting.

8. Eighth Circuit. —The Eighth Circuit has indicated it would
not permit evidence of income taxes but that the court might allow

a cautionary instruction. However, none of the Eighth Circuit deci-
sions discuss either issue in depth. Chicago & Northwestern
Railway v. CurU^^^ a personal injury action brought under FELA, ap-
pears to be the only Eighth Circuit decision dealing with the eviden-

tiary issue on taxes. The court of appeals in Curl held that the trial
court was correct in refusing to receive appellant's offer of proof of
appellee's average net earnings after deductions. In affirming the

decision, the court merely cited to Stokes v. United States^^'^ for sup-
port of the proposition that such evidence is too conjectural.

In a more recent decision, Raycraft v. Duluth, Missabe & Iron
Range Railway,^^^ another personal injury action brought under the

'"379 F.2d 893 (7th Cir.), cert, denied, 389 U.S. 1044 (1967).
'^364 F.2d 118 (2d Cir.), cert, denied, 385 U.S. 1008, rehearing denied, 386 U.S. 929

(1966).

'"178 F.2d 497 (8th Cir. 1949).
'"144 F.2d 82, 87 (2d Cir. 1944).

'"472 F.2d 27 (8th Cir. 1973).



680 INDIANA LAW REVIEW [Vol. 11:647

FELA, the appellant argued that the trial court had erred in refus-
ing to give a requested cautionary instruction concerning the non-

taxability of the award. The court noted that the Eighth Circuit had
not previously expressed an opinion on the subject and that the law

on the issue was unsettled. The court specifically refused to resolve
the issue, stating: "Even if this panel were to adopt the instruction,
this panel would do so only prospectively."'^® The court did indicate
in a footnote that it viewed the Curl opinion as having held that the
evidence of tax computation affecting gross income was improper.'*"

9. Ninth Circuit — Although the Ninth Circuit has officially
adopted the McWeeney Rule on the evidentiary issue, it is clear
from its discussion in its most recent decisions that it favors the ad-
missibility of such evidence.'" It has also taken the position that cau-

tionary instructions concerning the non-taxability of awards should

be allowed. A recent opinion dealing with both issues, Burlington
Northern^ Inc. v. Boxberger,^^^ is representative of the Ninth

Circuit's position. In Boxberger, the trial court had refused to allow

evidence of income taxes and rejected the defendant's request for a

cautionary instruction. After reviewing the McWeeney decision at
length, the court of appeals stated that under the compensatory

theory of damages the windfall that the survivors would receive in
tax-free dollars could not be justified either in fairness or logic.

The court noted several fallacies regarding the objections raised
in McWeeney against the admission of evidence of future tax im-
pact. First, the court rejected the primary objection that such

evidence is too speculative and uncertain on the grounds it was no
more speculative than other evidence submitted to the jury. Second,
McWeeney had suggested that the calculation of future tax liability
would be too confusing for the jury. The Ninth Circuit noted that
jurors had experience in determining their own tax liability and the
court was "confident that our juries and judges, with the aid of such
competent expert testimony as may be received, are equal to the
task and the responsibility."'*'

Finally McWeeney argued that any unfairness to the defendant
resulting from the refusal to admit evidence of future tax conse-

quences was counter-balanced by the unfairness to the plaintiff in
not admitting evidence of inflation and not compensating the plain-

tiff for his attorney's fees. This rationale was not applicable to the
Ninth Circuit, which had held that testimony as to future inflation

"•/d at 33.

'"See Burlington N., Inc. v. Boxberger, 529 F.2d 284 (9th Cir. 1975).

'"/d The court also indicated that any problem with speculativeness could be
reduced by careful court supervision of evidence admitted and instructions to the jury,

'"/d at 293.



1978] LOST FUTURE EARNINGS 681

was to be taken into consideration.'** Furthermore, as to attorney's
fees, the court indicated that the impact of these fees has no rela-

tion to the jury's task of estimating damages, unlike inflation and

taxation, which clearly would have occurred had the decedent

lived."® After indicating that fairness and logic would require a rule

providing for the admissibility of, and corresponding deduction to

account for, future income taxes in all cases, the court nevertheless

concluded that the adoption of such a broad rule would go against

the weight of authority. Therefore, the Ninth Circuit adopted the

flexible McWeeney Rule."*
Subsequent to Boxberger, the Ninth Circuit decided Felder v.

United States,^^'' a death action brought under the FTCA and con-
trolled by Arizona law, in which the court added a somewhat novel
rationale for requiring the consideration of income taxes. The court
argued that the failure to deduct income taxes in computing lost

future earnings would result in an award of punitive damages that
is impermissible under the FTCA."*

The Ninth Circuit has taken the position that a cautionary in-
struction should be allowed when requested. The court indicated
that when all factors were considered the balance was overwhelm-
ingly in favor of giving such an instruction. The court simply noted
that the instruction could do no harm, and it could certainly help by

preventing the jury from inflating the award on the erroneous
assumption that the judgment would be taxable."®

10. Tenth Circuit. — The Tenth Circuit has not considered
either issue in depth. However, it has ruled that both the considera-
tion of tax savings in the computation of lost future earnings'™ and

'"See United States v. English, 521 F.2d 63 (9th Cir. 1975).

"*529 F.2d at 294. The court also distinguished the question of attorney's fees as

follows: "Attorneys' fees are related to private contracts between the litigants and the

attorneys. They have no legitimate relevancy as to what amount of money is justly

compensatory for the loss resulting from the defendant's tortious act." Id,

"T'he court did hold, however, that under the McWeeney Rule taxes should have
been considered in this case, which involved an income span of $18,048 to $40,000 in

annual earnings. Id.

"'543 F.2d 657 (9th Cir. 1976).

""/d. at 669. The court distinguished two prior holdings, McCauley v. United

States, 470 F.2d 137 (9th Cir. 1972), and United States v. Becker, 378 F.2d 319 (9th Cir.

1967), in which it had affirmed awards that had not deducted projected income taxes

on the basis that in those cases the punitive damage issue had not been raised. Id. at

670.

'"Burlington N., Inc. v. Boxberger, 529 F.2d at 297. In balancing the factors to be

considered, the court held that the danger that the jury would assume the award was

taxable and increase damage award to compensate for taxes combined with the fact

that the instruction was neither time consuming nor confusing clearly led to the con-

clusion such instruction should be allowed. Id,

"'See Sanchez v. Denver & R.G.W. R.R., 538 F.2d 304 (10th Cir. 1976), cert
denied, 429 U.S. 1042 (1977). Sanchez was a personal injury action brought under the



682 INDIANA LAW REVIEW [Vol. 11:647

the giving of a cautionary instruction"* are to be left to the trial

judge's discretion.

11. District of Columbia Circuit. — The D. C. Circuit has no
cases directly addressing either issue. However, in Runyon v.
District of Columbia,"^ the court concluded that it was proper for
the estate of the deceased to recover an amount based on probable
net future earnings pursuant to the District of Columbia Survival

Statute."^ This net figure is computed by determining gross prob-

able future earnings by use of actuarial tables, subtracting taxes

and support, and then discounting the entire amount to present
value. The court did not discuss the rationale for its decision at
great length. In support of its conclusion, the court simply cited to

several state decisions allowing such evidence and to Professors

Harper and James' treatise on torts."*

D. State Courts

Floyd V. Fruit Industries,^''^ decided by the Connecticut Supreme
Court, is the leading state court decision upholding the admission of

evidence of the impact of future taxes. The court stated that it could
not conceive of a more unrealistic, unjust, or unfair rule than one
that would lead a jury to base their computations of future earnings

capacity on the hypothesis that no income taxes would be paid on

net earnings. The court also rejected the argument that such
evidence was too uncertain or conjectural, raising again the counter
argument that such evidence is no more speculative than many of
the other factors that must be submitted to the jury for considera-
tion."* Several other states have reached the same conclusion as

FELA in which the court of appeals simply noted that in some cases it would be un-
conscionable not to take income tax liability into account, and that conversely a similar

result could occur if too great a deduction were applied. Therefore, the admissibility of

such evidence was best left to the discretion of the trial court. See also DeWeese v.
United States. 419 F. Supp. 170 (D. Colo. 1976).

"'See Nichols v. Marshall, 486 F.2d 791, 794 (10th Cir. 1973). The court in Nichols
held it was not error to refuse to give a cautionary instruction but acknowledged that
neither would it be error to give such a "precautionary" instruction.

'"463 F.2d 1319 (D.C. Cir. 1972).

'"D.C. Code §§ 16-2701 to -02 (1973) (current version at id. §§ 16-2701 to -02 (Supp.

1978)).

"M63 F.2d at 1322 (citing Harper & James, supra note 96).
'"144 Conn. 659, 136 A.2d 918 (1957). Floyd was a wrongful death action in which

the trial court had instructed the jury to consider the offsetting factor of probable in-

come taxes on decedent's probable earnings. But cf. Gorham v. Farmington Motor Inn,
Inc., 159 Conn. 576, 271 A.2d 94 (1970) (trial court did not err in refusing to charge the

jury that the verdict in a personal injury action would not be subject to income tax).
"•144 Conn, at 666. 136 A.2d at 925. The court also rejected the plaintiffs conten-

tion that tax considerations would be more proper in a case involving a fatality than in

a case not involving a fatality. Id. at 667, 136 A.2d at 926.



1978] LOST FUTURE EARNINGS 683

Connecticut, using the rationale found in Floyd and the federal deci-

sions allowing such evidence.'"

The Missouri Supreme Court's opinion in Dempsey v. Thomp-
son"^ is the state court decision most often cited for the proposition

that a cautionary instruction should be given. The court rejected the
defendant's contention that taxes should be considered in arriving at

the amount of the award. However, the court held that the defen-
dant was entitled to have the jury instructed that the award was
not subject to taxation. The court reasoned that most jurors are not
only conscious of, but acutely sensitive to, the impact of taxes, while

few persons have knowledge of the exemption allowed under federal

law. Therefore, the court concluded it was reasonable to assume the
jury would believe the award was subject to taxation."*

The state court decision most representative of those standing
for the proposition that the court should allow neither evidence of

future tax liability nor a cautionary instruction is Hall v. Chicago &
Northwestern Railway, ^^'^ a personal injury action brought under the

FELA. The Illinois Supreme Court reasoned that since it is a
general principle of law that the status of the parties in a trial is im-

material, it follows that whether the plaintiff has to pay a tax on the

award is a matter that concerns only the plaintiff and the govern-
ment. The court also argued that Congress' intent in enacting the
exemption was to give an injured party a tax benefit. This benefit
would be nullified if the jury were to reduce the plaintiffs damages
to compensate for the tax exemption.'*'

In upholding the refusal to give a cautionary instruction, the

Illinois Supreme Court acknowledged that there was a possibility
that a defendant might be harmed if the jury made some type of ad-
justment for this imaginary tax. Nevertheless, the court preferred

to rely on the presumption that the jury will not take into con-

sideration any factors that they are not instructed to consider by

the trial court. The court also rejected the argument that a cau-
tionary instruction is proper merely because it correctly states the

"'Adams v. Deur. 173 N.W.2d 100 (Iowa 1969); Tenore v. Nu Car Carriers, Inc., 67
N.J. 466, 341 A.2d 613 (1975); Turrietta v. Wyche, 54 N.M. 5, 212 P.2d 1041 (1949);
Wilson V. Wylie, 86 N.M. 9, 518 P.2d 1213 (Ct. App. 1973); Geris v. Burlington N., Inc..
277 Or. 381, 561 P.2d 174 (1977).

'"363 Mo. 339, 251 S.W.2d 42 (1952). But see McBee v. Schlupbach, 529 S.W.2d 435
(Mo. Ct. App. 1975); Senter v. Ferguson. 486 S.W.2d 644 (Mo. Ct. App. 1972).

'"For other cases holding evidence of income tax liability inadmissible but requir-

ing a cautionary instruction, see High v. State Highway Dep't, 307 A.2d 799 (Del.
1973); Abele v. Massi. 273 A.2d 260 (Del. 1970).

"»5 111. 2d 135, 125 N.E.2d 77 (1955).

'"/d. at 152, 125 N.E.2d at 86.



684 INDIANA LAW REVIEW [Vol. 11:647

law.'*^ There have been numerous other state decisions reaching the
same result on both issues/*'

Only one state court appears to have adopted the McWeeney
Rule on the evidentiary issue, '®^ and a number of cases have simply
refused to allow any evidence of probable future tax liability with

no real discussion of an underlying rationale/*^ There have also been

a number of states that have held that while it would be proper to
give a cautionary instruction concerning the non-taxability of an

award, the decision to give such an instruction is totally within the

trial court's dis<f>retion.*** However, the majority of state cases deal-
ing with the single issue of the propriety of a cautionary instruction

have expressed disapproval of such an instruction.^*^

"*The court noted this argument could be adopted ad infinitum, to allow in-
numerable instructions — for example that the expense of trial is not provided for, that
the cost of medical witnesses is not paid by the defendant, etc., all of which are correct

statements of the law. Id.

'"See, e.g., Mitchell v. Emblade, 80 Ariz. 398, 298 P.2d 1034 (1956); St. Johns

River Terminal Co. v. Vadeu, 190 So. 2d 40 (Fla. Dist. Ct. App. 1966); Seaboard Coast

Line R.R. v. Thomas, 125 Ga. App. 716, 188 S.E.2d 89 (1972); Atlantic Coast Line R.R.

V. Brown, 93 Ga. App. 805, 92 S.E.2d 874 (1956); Green v. Texeira, 54 Haw. 231, 505
P.2d 1169 (1973); Cereal Byproducts Co. v. Hall, 16 111. App. 2d 79, 147 N.E.2d 383

(1958) (income tax refund cannot be considered in mitigation of damages); Spencer v.

Martin K. Eby Constr. Co., 186 Kan. 345, 350 P.2d 18 (1960) (confusing evidentiary
issue and cautionary instruction question); Lumber Terminals Inc. v. Nowakowski, 36
Md. App. 82, 373 A.2d 282 (1977); Briggs v. Chicago Great Ry.. 248 Minn. 418, 80

N.W.2d 625 (1957); Eriksen v. Boyer, 225 N.W.2d 66 (N.D. 1974); Bergfeld v. New York.
C. & St. L. R.R., 103 Ohio App. 87, 144 N.E.2d 483 (1956).

'"Morgan v. Liberty Mut. Ins. Co., 323 So. 2d 855 (La. Ct. of App. 1975).

•»»Beaulieu v. Elliot, 434 P.2d 665 (Alaska 1967); Reeves v. Louisiana & Ark. Ry.,
304 So. 2d 370 (La. Ct. of App. 1974); Missouri-Kan.-Tex. R.R. v. Miller, 486 P.2d 630

(Okla. 1971); Girard Trust Corn Exch. Bank v. Philadelphia Transp. Co., 410 Pa. 530,
190 A.2d 293 (1963); Oddo v. Cardi, 100 R.I. 578, 218 A.2d 373 (1966); Hardware Mut.
Cas. Co. V. Harry Crow & Son, 6 Wis. 2d 396, 94 N.W.2d 577 (1959).

"•See, e.g., Ahterley v. MacDonald, Young & Nelson. Inc., 142 Cal. App. 575, 298
P.2d 700 (1956); Ploud v. Southern Pac, 266 Or. 666, 513 P.2d 1140 (1973); Crum v.
Ward, 146 W. Va. 421, 122 S.E.2d 18 (1961); Behringer v. State Farm Mut. Ins. Co.. 6
Wis. 2d 595. 95 N.W.2d 249 (1959).

'"These decisions have used basically the same rationale as those federal decisions

refusing such instructions. See. e.g., Polster v. Girffs of America, Inc.. 82 Colo. App.

264, 514 P.2d 80 (1973), rev'd on other grounds, 184 Colo. 418. 520 P.2d 745 (1974);

Davis V. Fortuno & Jackson Chevrolet Co.. 32 Colo. App. 222. 510 P.2d 1376 (1973);
Kawanato v. Yesutake, 49 Haw. 42. 410 P.2d 976 (1966); Louisville & Nash. R.R. v.
Mattingly. 318 S.W.2d 844 (Ky. Ct. App. 1958). modified on other grounds, 339 S.W.2d

155 (Ky. Ct. App. 1960); Bracy v. Great N. Ry.. 136 Mont. 65. 343 P.2d 848 (1959). cert

denied, 361 U.S. 949 (1960); Chicago. Rock I. & Pac. R.R. v. Kinsey. 372 P.2d 863 (Okla.
1962); Crecelius v. Gamble-Skozmo, 144 Neb. 394, 13 N.W.2d 627 (1944); Scalise v. Cen-
tral R.R.. 129 N.J. Super. 303. 323 A.2d 525 (1974); Stallcup v. Taylor. 62 Tenn. App.

407. 463 S.W.2d 416 (1971); Dixie Feed & Seed Co. v. Byrd. 52 Tenn. App. 619. 376
S.W.2d 745. cert denied, 379 U.S. 878 (1964); Texas Consol. Trans, v. Eubanks, 340



1978] LOST FUTURE EARNINGS 685

III. Summary

A. Inflationary & Productivity Factors

Unfortunately for attorneys practicing law in Indiana, neither

jurisdiction they would be most concerned with, the Indiana

Supreme Court nor the Seventh Circuit, has ever directly con-
sidered the admissibility of expert testimony on the effects of in-

creased productivity and inflationary trends on the computation of

lost future earnings. However, there are several Indiana cases in-

dicating that such evidence is admissible. While most of the Federal

Courts have addressed the issues, no general agreement has been

reached. The First, Second and Fifth Circuits have taken the
clearest stance against the use of such evidence, noting that it is far

too speculative to be considered. Furthermore, the courts suggest

that any undercompensation that might appear to result from the

failure to consider the effects of inflation is offset by the concurrent

increase in interest rates paid on investments and the refusal by

most courts to allow a deduction of probable future income taxes
from any award. However, even among these three circuits, there
have been indications that the courts will allow evidence as to in-

creased productivity to be admitted, provided a strict foundation is

first laid to insure the reliability of such evidence.

Another approach, adopted by the Sixth and Eighth Circuits, re-

jects the notion that specific evidence as to inflationary trends

should be received and considered but permits introduction of

evidence on productivity increases, such as probable future raises in

income or promotions. While holding evidence of future inflationary

trends too speculative to be admissible, both circuits allow inflation

to be taken into account by allowing the jury to consider diminished

or increased purchasing power of the dollar. This approach appears
to be an attempt by the circuits to avoid the use of expert witnesses

to develop inflated awards.

A third approach is that followed by the Ninth and Tenth Cir-
cuits. These circuits allow evidence of both future inflationary

trends and possible increases in productivity to be considered in

determining lost future earnings based on the rationale that dealing

with inflationary trends is the best way to insure a fairer and more
accurate result. However, both circuits have added the caveat that
they were not authorizing any arbitrary guesswork in determining
inflationary effects and that a strict foundation should be laid before

such evidence is permitted. While the Third Circuit originally re-

S.W.2d 830 (Tex. Ct. App. 1960); John F. Buckner & Sons v. AUen, 289 S.W.2d 387
(Tex. Ct. App. 1956); Missouri-Kan.-Tex. R.R. v. McFerrin. 156 Tex. 69, 291 S.W.2d 931

(1956).



686 INDIANA LAW REVIEW [Vol. 11:647

jected the introduction of such evidence as being too speculative, re?

cent decisions have indicated a modification of its original position

towards the approach taken by the Ninth and Tenth Circuits.

Likewise, a district court of the Fourth Circuit has rendered a re-

cent decision that if followed by the court of appeals in the Fourth

Circuit would indicate the adoption of a position similar to that of

the Ninth and Tenth Circuits.

The majority of the state courts that have addressed the issue
have allowed such evidence. This would appear to be the current

trend. The state courts, like the federal courts allowing such
evidence, do so on the rationale that other factors equally

speculative are already considered in determining damages, and that

to ignore inflationary trends and evidence of increased productivity

would lead to undercompensating the injured party. These courts

also indicate that to exclude such evidence is to avoid economic

reality and to indulge in the equally questionable presumption that

inflation will not occur. However, decisions advocating the admission

of such evidence require a strict foundation to insure the trust-

worthiness of the evidence.

The state courts excluding such testimony also follow basically
the rationale of the federal courts, emphasizing the lack of consen-

sus among economists and the basic unreliability of the science of
economics in its efforts to accurately forecast economic conditions.

State courts also express concern that allowing consideration of

such factors will open the door to what they consider other col-
lateral issues that would impair the proper functioning of the jury.

Specifically, the courts note such additional evidence on factors such

as taxes, deflation, and attorney fees would have to be allowed if

evidence of inflation and productivity factors were to be considered.
As a result, the jury would be caught in a quagmire of conflicting
expert testimony and would lose sight of the main issues of the case.

Finally, most courts also note that any apparent undercompensation
is offset by the fact that a plaintiff receiving a large sum of money
may invest the money in a manner that will give him some protec-
tion against inflation.

Thus, while there is an even split between federal courts allow-
ing consideration of inflationary and productivity factors and courts
not permitting evidence of such factors, the more recent federal
decisions and the vast majority of state courts favor admissibility.
However, even these courts have indicated reluctance to allow
testimony that is based on unrealistically short time periods or
uniquely inflationary periods. The courts have also been reticent to
allow projections too far into the future because long term predic-
tions of continued inflation lead to excessively high verdicts. In
essence, such long term projections predict economic doom, since no



1978] LOST FUTURE EARNINGS 687

economy can function on a continued inflationary spiral. While the
courts have reacted more favorably towards admission of evidence
concerning increased productivity than evidence of inflationary

trends, they still require a strict foundation to be laid, generally con-

sisting of the particular individual's past wage increases. In the
absence of such evidence, the courts require evidence of wage in-
creases of an individual in as similar a position to the injured party

as possible.

B. Income Taxes

1. Evidence of Tax /wjoact— Indiana is among the majority of
states that have held that inquiries at trial into the incidents of tax-

ation in damage suits would be too conjectural and confusing and
would inject collateral issues into the trial. However, the issue has

only been discussed where a party has merely requested a cau-
tionary instruction to the effect that the award is non-taxable. The
issue of the admissibility of evidence of the impact of income taxa-

tion on the award is entirely distinct from the question of the pro-
priety of a cautionary instruction. Although the Indiana Supreme
Court has failed to make this distinction, it has been acknowledged
by the Indiana Court of Appeals. Only four states, Connecticut, New
Jersey, Iowa and New Mexico, have held evidence of future tax im-
pact should be considered, relying on the basic rationale that such

evidence is no more speculative than other factors used to compute
lost future earnings and that to do otherwise would lead to over-

compensation of the plaintiff.

Only one state has adopted the McWeeney Rule permitting the
jury to consider income taxes only in those cases where taxes will
have a significant and substantial effect in the computation of prob-

able future earnings. However, among the federal courts, the Mc-
Weeney Rule has clearly become the majority rule. It has been
adopted by the Second, Fourth, Fifth, Sixth, Seventh and Ninth Cir-

cuits. While the Fourth Circuit and the D. C. Circuit require the im-

pact of taxes to be considered in wrongful death actions, no federal

court has even held that evidence of the projected effect of taxes on

plaintiffs damages is always admissible, although there is dicta in a
Ninth Circuit decision that evidence of the impact of taxation should

be considered in all cases.

The McWeeney Court advanced the following propositions in
support of its decision: (1) The determination of future tax liability
would be too conjectural in light of factors such as changes in the
family status of the injured party in years to come, possible changes

in the exemption and deduction provisions of the tax law, possible
changes in the rates of taxation, and so forth; (2) The use of a net in-
come theory would be too complex and confusing for the jury; (3)



688 INDIANA LAW REVIEW [Vol. 11:647

Other factors such as inflation and attorney fees tend to counter-
balance any resulting overcompensation.

These propositions have come under sharp attack in dissenting
opinions and legal commentaries. In response to the objection that
such a determination would be too conjectural, it is generally noted
that evidence of the impact of income taxes on future earnings is no
more speculative than other factors used to compute damages. In
fact, the existence of income tax in this country is less conjectural
than the continuance of the plaintiffs salary during the same period.
The argument for the first proposition loses much of its force when
a court is willing to consider the equally if not more speculative fac-
tors of inflation and productivity. Even those federal circuits holding
such evidence to be too speculative have acknowledged that when
state law requires the effect of inflation to be considered one must
in all fairness allow evidence of the impact of income taxes to be
considered.

It is difficult to accept the second assertion made by the Mc-
Weeney Court that the tax issue is beyond the understanding of the
layman when it is realized that the average American is exposed to
tax computations and considerations in his everyday life and would

thus appear to be qualified to assess such problems at trial. Finally,

the argument that consideration of taxes would lead to the necessity
of considering attorney's fees is discredited when one realizes that
unlike taxation, which undoubtedly would have occurred whether or

not the party had been injured, the impact of attorney's fees has no

relation to the jury's task of estimating what the individual's future
earnings would have been. Also, attorney's fees are the result of

private contract between the litigant and attorneys and are thus ir-

relevant to the issue of just compensation.

Of the circuits not adopting the McWeeney Rule, the Tenth Cir-
cuit has taken the position that the admissibility of such evidence is

totally within the trial court's discretion. Only the First, Third, and

Eighth Circuits hold all evidence of income tax impact inadmissible,

based on such various rationales as Congressional intent, collateral

source doctrine or that such evidence is too speculative. However,
even these courts acknowledge that when the plaintiff receives his
gross earnings he is being overcompensated. One decision from the
Ninth Circuit went so far as to hold in an FTCA case that failure to
consider taxes was the equivalent of awarding punitive damages,
which is impermissible under the FTCA.^*®

2. Cautionary Instruction on Taxes. —Many courts, especially
the state courts, including Indiana, have refused to give a cau-

tionary instruction because they have confused the problem of the

"Telder v. United States. 543 F.2d 657 (9th Cir. 1976).



1978] LOST FUTURE EARNINGS 689

cautionary instruction with the problem of whether the evidence of

the incidence of taxation should be admitted during trial. Once these

issues are confused, the court points out how "confused" the jury
would be with this additional information. The fallacy of these
arguments is that the requested instruction does not relate to the

impact of taxation on plaintiffs future wages and requires no com-
plex calculations. It concerns only the effect of the tax laws on plain-

tiffs award. The purpose of such a cautionary instruction is merely

to dispel any misconceptions that the jurors might hold on this ques-

tion. A recent Indiana Court of Appeals decision has recognized this
distinction that eluded the Indiana Supreme Court.

In contrast to the clear majority following the McWeeney Rule
on the evidentiary issue, the federal courts that have considered

whether a form of a cautionary instruction should be given have not

ruled uniformly. Three circuits, the Second, Sixth, and Tenth, have

held that the decision to give such an instruction is within the trial

court's discretion. Therefore, it will not be reversible error either to

refuse such an instruction, or to give such an instruction. The First
Circuit, while holding the refusal to give such an instruction was not
error, indicated that if there was evidence that the jury was im-
properly considering taxes it would be error not to give the instruc-

tion. The Eighth Circuit has specifically refused to rule on the ques-
tion. The Fifth Circuit flatly rejects the propriety of a cautionary in-
struction. The Third and Ninth Circuits have held that such an in-
struction must be given in future cases. The Third and Ninth Circuit
holdings are also supported by the majority of commentators who
have considered the question. However, the majority of states ad-
dressing the issue have held such an instruction should not be given.

The better rationale used in those federal and state cases that
disapprove of the use of the instruction is that it cannot be assumed
that the jury will not follow instructions when it has been correctly
instructed on the measure of damages. Since there is a possibility of
harming the plaintiff by allowing such an instruction, it is better to
instruct the jury on the proper measure of damages and then rely
on the presumption that it will follow the instruction. The
counterargument is that, given the general tax awareness of the

average citizen and the fact that few persons actually know of the
special exclusion for personal injury awards, failure to give such an

instruction could result in the plaintiff receiving an enhanced award
based on the probable misconception that the amount awarded by
the jury will be reduced up to fifty percent by taxes.

C. Conclusion

The Indiana courts at the present apparently give the plaintiffs
attorney the worst of both worlds, indicating indirectly that



690 INDIANA LAW REVIEW [Vol. 11:647

economic trends may be considered but projections of future tax
liability or cautionary instructions may not. Although many courts
have done so, it is theoretically inconsistent to admit evidence of

any one of the factors (that is inflationary/productivity evidence as

opposed to tax impact evidence) without admitting evidence of the

other. The objective of the basic system of damages in this country
is to place the injured party in the same position, as nearly as can
be done with a monetary award, as he or she would have been had

the wrong not occurred. Since inflationary/productivity factors and
taxes would both theoretically affect the injured party's position, it

is inconsistent to admit evidence of one and not the other.

However, it may be more practical to admit evidence of tax im-
pact evidence than inflationary/productivity evidence. Tax factors
are less speculative than inflationary and productivity factors. It is

more probable that taxes will continue at present rates than infla-
tion, if only for the reason that no economy can continue to exist
with constantly spiraling inflation. Furthermore, while taxes are

generally a certainty of life that the plaintiff would have had to

bear, the plaintiff and defendant must equally share the risk of infla-
tionary and depressionary periods. Finally, any undercompensation

due to inflation will be partially offset by realization of a higher in-

terest rate than that used in discounting the award to present
value. Nevertheless, the tendency of several courts in the past, in-

cluding those in Indiana, has been to allow evidence of inflation and

productivity and to exclude evidence of the impact of income taxes,

a position which appears to be wholly untenable.

Perhaps the McWeeney Rule is the best approach to the tax
issue, although the courts have been vague in setting out the ra-

tionale that underlies the rule. Some courts question the relevancy
of such evidence. These courts are actually confusing relevancy with

countervailing factors such as danger of confusion, collateral issues,

or delay that may outweigh the probative value of such evidence. To
say such evidence is not "relevant" or "pertinent" is to ignore the

basic guide of tort law, which is to compensate the plaintiff for what
he has lost. Although the McWeeney Rule has seldom been analyzed
as such, it could be considered as an evidentiary rule, weighing pro-

bative value against probative danger. When admittedly relevant
evidence has, on balance, a greater tendency to frustrate rather

than to promote the ultimate end of just compensation, the trial

court must exercise its discretion and refuse to admit it. Thus, at
the lower and middle income levels, where the probative value of
such evidence is less and the probative dangers greater, such

evidence is often not allowed, while at the higher income brackets

and consequently higher tax rates, the probative value increases suf-

ficiently to outweigh any probative dangers.



1978] LOST FUTURE EARNINGS 691

Finally, as to the propriety of a cautionary instruction, the

benefits of informing the jury of the actual consequences appear so

obvious, and the burden in terms of confusion so minimal, that the

argument for giving such an instruction is clearly the better posi-
tion.

Inflation, productivity, and taxes do affect future earnings and

should be considered if the injured party is to be adequately com-

pensated. Furthermore, today's juror is likely to consider such fac-

tors regardless of whether evidence is presented on these issues and

regardless of the lack of instructions. Therefore, it should be the

court's duty to insure that the jury has competent evidence on

which to base such predictions by requiring a strict foundation to be

laid to assure the evidence is as reliable as possible.

Edwin b. Wainscott