Kaye, John R.

English

University of Baltimore School of Law

University of Baltimore Law ReviewVolume 13Issue 1 Fall 1983 Article 151983Casenotes: Tort Law — Upon Request, Jurors in aPersonal Injury Case Must Be Instructed That theDamages Awarded Are Not Subject to Federal andState Income Taxes. Blanchfield v. Dennis, 292 Md.319, 438 A.2d 1330 (1982)John R. KayeUniversity of Baltimore School of LawFollow this and additional works at: http://scholarworks.law.ubalt.edu/ublrPart of the Torts CommonsThis Article is brought to you for free and open access by ScholarWorks@University of Baltimore School of Law. It has been accepted for inclusion inUniversity of Baltimore Law Review by an authorized administrator of ScholarWorks@University of Baltimore School of Law. For more information,please contact snolan@ubalt.edu.Recommended CitationKaye, John R. (1983) "Casenotes: Tort Law — Upon Request, Jurors in a Personal Injury Case Must Be Instructed That the DamagesAwarded Are Not Subject to Federal and State Income Taxes. Blanchfield v. Dennis, 292 Md. 319, 438 A.2d 1330 (1982)," University ofBaltimore Law Review: Vol. 13: Iss. 1, Article 15.Available at: http://scholarworks.law.ubalt.edu/ublr/vol13/iss1/15TORT LAW - UPON REQUEST, JURORS IN A PERSONAL IN-JURY CASE MUST BE INSTRUCTED THAT THE DAMAGESAWARDED ARE NOT SUBJECT TO FEDERAL AND STATE IN-COME TAXES. Blanchfield v. Dennis, 292 Md. 319, 438 A.2d 1330(1982).After receiving unnecessary chemotherapy treatment, the patientsued her physician for negligent diagnosis.' At the conclusion of thetrial the judge refused to grant the physician's request to instruct thejury that any damages awarded to the plaintiff would not be subject toincome taxes.2 The jury awarded the patient $800,0003 and the physi-cian appealed, contending that the court erred in not giving the re-quested jury instruction. Maryland's intermediate appellate court heldin favor of the defendant and remanded the case for retrial on the dam-ages issue.4 The Court of Appeals of Maryland granted certiorari andruled that upon request, jurors in a personal injury case must be in-structed that any damages awarded are not subject to federal and stateincome taxes.'The issue of whether a jury should consider the effect of incometaxes, when determining lost income or awarding damages, has beenexamined by a substantial number of courts since World War 11.6 Mostcourts generally have been reluctant to inject tax considerations intojury deliberations in personal injury and wrongful death actions.7 Themajority view has its genesis in Hall v. Chicago & North Western Rail-1. After noticing a problem with her vision, the patient entered a hospital where herphysician administered tests. After release from the hospital, her physician in-formed her that she was suffering from terminal multiple myeloma and only had ashort time to live. In an effort to retard the progress of the disease, the physicianinitiated chemotherapy treatment, which caused the patient to become so ill thatshe had to retire from her job. The physician discontinued the chemotherapytreatment after one month. Subsequently the patient sought a second medicalopinion from the Sloan-Kettering Memorial Cancer Center in New York. There,after 20 days of laboratory tests, she was informed that she never had multiplemyeloma and should never have been subjected to chemotherapy. Blanchfield v.Dennis, 292 Md. 319, 321-22, 438 A.2d 1330, 1331-32 (1982).2. Federal law provides that gross income does not include "the amount of any dam-ages received (whether by suit or agreement) on account of personal injuries orsickness." I.R.C. § 104 (a)(2) (1976). Maryland law states that "[tlhe taxable netincome of an individual taxpayer of this State shall be that taxpayer's federaladjusted gross income as defined in the laws of the United States." MD. ANN.CODE art. 81, § 280(a) (1980).3. The verdict was reduced to $400,000 through remittitur. Blanchfield v. Dennis,292 Md. 319, 320 n.1, 438 A.2d 1330, 1331 n.1 (1982).4. Blanchfield v. Dennis, 48 Md. App. 325, 428 A.2d 80 (1981), afl'd, 292 Md. 319,438 A.2d 1330 (1982).5. Blanchfield v. Dennis, 292 Md. 319, 438 A.2d 1330 (1982).6. The recent focus on the propriety of considering income tax in fixing damages inpersonal injury or death cases is probably attributable to the high level of incometax and the increase in damage verdicts occurring since the end of World War II.Annot., 63 A.L.R.2d 1393, 1395 (1959).7. E.g., Highshew v. Kushto, 235 Ind. 505, 134 N.E.2d 555 (1956); Eriksen v. Boyer,225 N.W.2d 66 (N.D. 1974).Blanchfield v. Dennisway Co. ,8 in which the Supreme Court of Illinois held that a jury wasproperly instructed to disregard any reference made to the tax exemptstatus of a jury award. The Hall court based its holding on three con-siderations: (1) a tax exempt instruction would have been extraneous;9(2) the parties' status in a lawsuit is immaterial because the plaintiffsdisposition of an award is of no concern to the jury;' 0 and (3) this in-struction would nullify the congressional intent to bestow a benefit onthe victim. IBy contrast, the minority view is represented by Dempsey v.Thompson.'2 In Dempsey, the Supreme Court of Missouri concludedthat most jurors, while aware of the impact of taxes upon income, aregenerally ignorant of the laws which exempt taxes from personal injuryand wrongful death awards.' 3 The court reasoned that the average ju-ror might erroneously inflate an award to compensate the victim on themistaken belief that the award would be reduced by income taxes. TheDempsey court therefore concluded that an instruction which correctlystated the law would help to prevent possible jury misunderstanding. 'aThe issue in Blanchfield of whether to instruct the jury that dam-ages for personal injuries are exempt from federal and state income taxwas one of first impression in Maryland.' 5 The Court of Special Ap-peals of Maryland, however, had previously ruled in Lumber Terminalsv. Nowakowski' 6 that a jury should not consider evidence of income taxconsequences when fixing damages for loss of past earnings or for im-pairment of future earning capacity because of personal injuries.' 7 Al-though Lumber Terminals was confined to this issue, the intermediateappellate court stated in dictum that "[tjaxes are strictly between theplaintiff as taxpayer and the government as collector, and are of nolegitimate concern of the defendants. . . . The tax exemption was in-tended by Congress to benefit the injured party, not the wrongdoer."' 88. 5 III. 2d 135, 125 N.E.2d 77 (1955). For a complete survey of the states, see An-not., 63 A.L.R.2d 1393, 1398-1416 (1959 & Later Case Service 1976 & Supp.1983).9. Hall v. Chicago & N.W. Ry. Co., 5 11. 2d 135, 152, 125 N.E.2d 77, 86 (1955).10. Id at 151-52, 125 N.E.2d at 86.11. Id at 152, 125 N.E.2d at 86.12. 363 Mo. 339, 251 S.W.2d 42 (1952).13. Id at 346, 251 S.W.2d at 45.14. Id15. Dennis v. Blanchfield, 48 Md. App. 325, 337, 428 A.2d 80, 87 (1981), aft'd, 292Md. 319, 438 A.2d 1330 (1982).16. 36 Md. App. 82, 373 A.2d 282 (1977). A stevedore was injured when a lumbercarrier ran over his foot. At trial, the employer objected to the trial judge's refusalto permit expert testimony as to the plaintiff's net wages.17. Id at 96-97, 373 A.2d at 291. The Lumber Terminals court stated "the award ofdamages should be based upon the plaintiff's gross earnings or earnings capacityand should not be reduced because of any income tax savings which may result tothe plaintiff from the fact that the damages will be exempt from income tax." Idat 97, 373 A.2d at 291-92.18. Id at 98, 373 A.2d at 291-92.19831Baltimore Law ReviewThe court of appeals in Blanchfield v. Dennis 19 found separate the issuesof the jury instruction concerning the tax exempt status of jury awardsand the propriety of evidence pertaining to tax consequences upon lostincome. Blanchfield thus avoided overruling Lumber Terminals basedon this distinction.20The Blanchfield court relied heavily on the 1980 United StatesSupreme Court case of Norfolk & Western Railway Co. v. Liepelt.2'The Liepelt Court held that evidence relating to the effect of taxes onthe decedent's past and future earnings was admissible to reduce a Fed-eral Employer's Liability Act (FELA) award based on those earnings,22and the jury should also be instructed, upon request, that any awardwould not be subject to taxation as income.2 3 The portion of theLiepelt decision concerning admission of tax evidence to estimateproper damages was not presented to the Blanchfield court.24 The courtof appeals, though, strictly conformed to the second holding of Liepelt,reasoning that since the instruction was a plain statement of law, itwould help to prevent a jury from mistakenly inflating an award andovercompensating a plaintiff.25 The Blanchfield court agreed with theLiepelt Court's conclusion that the average juror would be under thefalse assumption that an award would be subject to taxes and that therequested instruction would dispel that erroneous belief.26 While ac-knowledging that it was adopting the minority view, Blanchfield sug-gested that the majority view might now be overruled because many ofthe majority holdings were rendered in FELA actions; since Liepeltnow controlled the disposition of all FELA cases, precedent was sub-19. 292 Md. 319, 438 A.2d 1330 (1982).20. Id at 323 n.5, 438 A.2d at 1332-33 n.5; accord Tenore v. Nu Car Carriers, Inc., 67N.J. 466, 341 A.2d 613 (1975). The Tenore court stated:The matter of income taxes has concerned the courts in two ways: (1)should future taxes be deducted from future wages in estimating lossesfrom deprivation of future earnings; (2) should juries be told the fact thatawards of damages are not subject to income taxes. Different considera-tions apply to these questions but the courts have frequently dealt withthem together. The first problem is addressed to precision in estimatingloss of future earnings; the second, to the matter of dissuading the juryfrom increasing a verdict on the mistaken assumption that the damagesare taxable and a desire to make the plaintiff whole as against such taximposition.Id at 485, 341 A.2d at 623.21. 444 U.S. 490, reh'g. denied, 445 U.S. 972 (1980). In Liepell, a fireman employedby the railroad was killed in a locomotive collision. In the subsequent wrongfuldeath action, the trial court refused to permit the railroad to introduce evidenceshowing what the decedent's net income would have been after taxes and deniedthe requested jury instruction that any award would not be subject to incometaxes. Liepelt, 444 U.S. at 492.22. Id at 493-96.23. Id at 496-98.24. Blanchfield v. Dennis, 292 Md. 319, 323 n.5, 438 A.2d 1330, 1332-33 n.5 (1982).25. Id at 324, 438 A.2d at 1333 (citing Norfolk & W. Ry. Co. v. Liepelt, 444 U.S. 490,498 (1980)).26. Blanchfleld, 292 Md. at 324, 438 A.2d at 1333.[Vol. 13Blanchfield v. Dennisject to rejection.27 The court of appeals concluded that the effect of thebrief cautionary instruction would not complicate the case, confuse thejury, or introduce irrelevant matters at trial.28While the Blanchfield decision is logical and should discourage in-flated jury awards in personal injury cases, the court of appeals ne-glected to address a fundamental concern of the plaintiff. The plaintiffargued that by exempting damage awards from income taxation in per-sonal injury cases, Congress intended to bestow a benefit upon the in-jured victim. Consequently, if instructed that any award it gives is taxfree, the jury may erroneously reduce an award and thereby deprivethe victim of the intended congressional benefit. 29 The majority inLiepelt, though, found nothing in the legislative history or the languageof the applicable federal statute3" to suggest that this tax exclusion wasto impact on the measurement of damages.3' in Lumber Terminals, thecourt of special appeals had previously rejected a preference for bring-ing tax considerations before the jury.32 In addition, Lumber Termi-nals intimated that Congress intended the tax exemption for juryawards in personal injury cases as a benefit to the injured party.33Therefore, unlike the Supreme Court, Maryland found that Congressintended such a benefit.The Liepelt Court permitted the admission of tax evidence to esti-mate true earnings loss.34 This position had been specifically rejectedearlier by Lumber Terminals. 35 Although the issue of admission of taxevidence was not presented to the Blanchfield court, the court of ap-peals did assert that it would recognize the Lumber Terminals decisionand would express no view concerning its propriety.36The Blanchfield decision does contain attractive logic and commonsense. A jury instruction that damages in a personal injury case areexempt from federal and state taxation will reduce jury misconceptionand confusion when determining the proper amount of damages.37 As27. Id. at 327, 438 A.2d at 1334.28. Id. at 326, 438 A.2d at 1334.29. Brief for Appellant at 15-16, Blanchfield v. Dennis, 292 Md. 319, 438 A.2d 1330(1982).30. I.R.C. § 104(a)(2) (1976).31. The majority stated that "we see nothing in the language and are aware of nothingin the legislative history of [I.R.C.] § 104(a)(2) to suggest that it has any impactwhatsoever on the proper measure of damages in a wrongful-death action." Nor-folk & W. Ry. Co. v. Liepelt, 444 U.S. 490, 496 n.10 (1980).32. Lumber Terminals v. Nowakowski, 36 Md. App. 82, 373 A.2d 282 (1977).33. Id. at 98, 373 A.2d at 292.34. Norfolk & W. Ry. Co. v. Liepelt, 444 U.S. 490, 493-96 (1980).35. Lumber Terminals v. Nowakowski, 36 Md. App. 82, 373 A.2d 282 (1977).36. Blanchfield v. Dennis, 292 Md. 319, 323 n.5, 438 A.2d 1330, 1332 n.5 (1982).37. See, e.g., id at 321, 438 A.2d at 1332-33, in which the court of appeals approvedthe instruction that "any damages awarded to the plaintiff are not income to herwithin the meaning of federal and state income tax laws, and no income tax willbe owed or paid thereon." In Liepelt, the Supreme Court permitted the followinginstruction: "your award will not be subject to any income taxes, and you should19831Baltimore Law Reviewsuch, the court of appeals should not reject Lumber Terminals by ex-panding Blanchfield Overruling Lumber Terminals would create enor-mous problems for the court and the jury. For example, juries wouldbe given the task of calculating complex tax issues, expert tax testimonywould often become necessary, and tax evidence would transform sim-ple tort actions into unnecessarily complicated trials.38 Thus, the posi-tive effects of the Blanchfield decision, simplicity and clarity, must beretained by Maryland courts.John R. Kayenot consider such taxes in fixing the amount of your award." Liepelt, 444 U.S. at492.One of the main concerns suggested by the patient was that juries, upon hear-ing the instruction on the tax exempt status of damages in personal injury actions,might mistakenly reduce the award and thereby negate the tax exemption benefitto the victim. The instruction set forth below may prevent the loss of this benefit:I charge you, as a matter of law, that any award to the plaintiff in thiscase, if any is made, is not income to the plaintiff within the meaning ofthe federal income tax law. Should you find that plaintiff is entitled toan award of damages, then you are to follow the instructions alreadygiven to you by this Court in measuring those damages, and in no eventshould you either add to or subtract from that award on account of fed-eral income taxes.Domeracki v. Humble Oil & Refining Co., 443 F.2d 1245, 1248-49 (3d Cir.) (em-phasis supplied), cert. denied, 404 U.S. 883 (1971). This instruction seems to em-phasize that the tax exemption plays no role in the awarding of damages. See alsoMorris, Should Juries in Personal Injury Cases Be Instructed That Plaintiffs' Reco v-eries Are Not Within The Meaning Of Federal Tax Law?, 3 DEF. L.J. 3 (1958)(detailed discussion of the benefits of such jury instructions).38. Comment, Income Taxation And The Calculation of Tort Damage Awards." TheRamiflcations of Norfolk & Western Railway v. Liepelt, 38 WASH. & LEE L. REV.289 (1981).[Vol. 13

Casenotes: Tort Law — Upon Request, Jurors in a Personal Injury Case Must Be Instructed That the Damages Awarded Are Not Subject to Federal and State Income Taxes. Blanchfield v. Dennis, 292 Md. 319, 438 A.2d 1330 (1982)

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Casenotes: Tort Law — Upon Request, Jurors in a Personal Injury Case Must Be Instructed That the Damages Awarded Are Not Subject to Federal and State Income Taxes. Blanchfield v. Dennis, 292 Md. 319, 438 A.2d 1330 (1982)

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