C.P.R.C. SECTION 18.091(a) DOES NOT APPLY TO PERSONAL INJURY CASES

By Daniel D. Horowitz, III

&

Andrew Taylor

In 2003, as part of sweeping tort reform, the Texas Legislature enacted section 18.091(a) of the Texas Civil Practice and Remedies Code. Section 18.091(a) states:

Notwithstanding any other law , if any claimant seeks recovery for loss of earnings, loss of earning capacity, loss of contributions of a pecuniary value, or loss of inheritance, evidence to prove the loss must be presented in the form of a net loss after reduction for income tax payments or unpaid tax liability pursuant to any federal income tax law . [i] (Emphasis added)

The purpose of this article is to show why Texas Civil Practice and Remedies Code section 18.091(a) does not apply to personal injury cases. Defense attorneys have attempted to use this statute as a tool in their fight to lower damages that injured plaintiffs can recover. Under the defense's reading of section 18.091(a), plaintiffs who have suffered lost wages or loss of future earning capacity as a result of personal injuries must present such damages in the form of a net loss after income tax considerations. The defense has conveniently ignored the following crucial parts of the statute, " notwithstanding any other law" and "pursuant to any federal income tax law ." These portions of the statute, along with federal income tax law, render section 18.091(a) inapplicable to personal injury cases. As explained below, because damages recovered on account of personal injury or sickness are not included in gross income and not taxable, section 18.091(a) does not apply.

 

With all of its complexities and seemingly never ending sections, the Internal Revenue Code is very clear on one thing. Gross income is all income from whatever source derived. [ii] However, the code allows certain income to be excluded from gross income. One section which could not be any more apparent is section 104(a)(2). Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received on account of personal physical injuries or physical sickness. [iii] This includes lost wages. For example, assume that a taxpayer is walking through a hardware store, and is injured when a stack of lumber falls on her. Further assume that as a result of that injury she suffers medical expenses, lost wages, and pain and suffering. If the taxpayer receives damages of $90,000 she can exclude the entire $90,000 from her gross income. [iv] Her medical expenses, and pain and suffering clearly meet the damages received on account out of personal injury and sickness requirement of section 104(a)(2). Additionally, if her lost wages resulted from personal injury or sickness they also meet the requirement of section 104(a)(2). The crucial element to proper exclusion under section 104(a)(2) is that the damages are received on account of personal physical injuries or physical sickness.

 

With any code section it is important to determine how courts have interpreted it in certain cases. Luckily, the highest court in the United States has clearly stated what can be excluded from gross income. [v] In Schleier, the plaintiff received a settlement arising out of an ADEA claim against his former employer. [vi] Half of Schleier's settlement was attributable to back pay and half to liquidated damages. [vii] On his tax return, Schleier included the back pay portion in gross income but excluded the part that was attributed to liquidated damages. [viii] Both the Tax Court and the Fifth Circuit agreed that the entire amount received was excludable under section 104(a)(2), on account of personal injury and sickness. [ix] However, the US Supreme Court granted certiorari and held that a recovery under ADEA could not be excluded from gross income. [x] The Court determined that in order to be excluded from gross income, damages received must be on account of personal injury or sickness. [xi] Although Mr. Schleier did receive damages for back wages, they cannot be excluded from gross income because not only were they not on account of any personal injury, because no personal injury affected the amount of back wages recovered. [xii] The bottom line is that damages received on account of personal injury and sickness are excluded from gross income and not subject to taxation. This includes lost wages.

Because lost wages received on account of personal injury or sickness are not included in gross income and not taxable, they can not be presented in a net tax form. Therefore, section 18.091(a) does not apply. The plain language of section 18.091(a) makes this clear. It states "not withstanding any other law" and "pursuant to any federal income tax law." This language shows that section 18.091(a) must be applied consistent with federal tax law. Forcing a plaintiff to bring forth evidence of loss of earnings, loss of earning capacity, loss of contributions of a pecuniary value, or loss of inheritance presented in the form of a net loss after reduction for income tax payments or unpaid tax liability pursuant to any federal income tax law is patently in opposition to both the plain language of section 18.091(a) and The US Supreme Court's interpretation of section 104(a)(2) of the Internal Revenue Code. If in the end these damages are to be excluded from gross income, it goes against all logic to require a Plaintiff to present them to the jury in the form of a net loss after reduction of such tax. To apply section 18.091(a) to personal injury cases would allow for negligent defendants to pay less in damages than the injured plaintiffs actually suffered. The answer is apparent, Texas Civil Practice and Remedies Code §18.091(a) does not apply to personal injury cases.

 


[i]. CPRC §18.091(a)

[ii]. 26 U.S.C.A §61(a)

[iii]. 26 U.S.C.A §104(a)(2)

[iv]. 26 U.S.C.A §213(a)

[v]. Comm'r of Internal Revenue v. Schleier, 515 U.S. 323.

[vi]. Id. at 326

[vii]. Id.

[viii]. Id. at 327

[ix]. Id.

[x]. Id.

[xi]. Id. At 320

[xii]. Id.

Daniel D. Horowitz, III is an associate with the law firm of Abraham, Watkins, Nichols, Sorrels, Agosto & Friend.

They specialize in plaintiffs' personal injury and commercial litigation.

800 Commerce Street

Houston, Texas 77002

713-222-7211Phone

713-587-9668 Facsimile

dhorowitz@abrahamwatkins.com

Andrew Taylor is a law student at South Texas College of Law