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To put the matter simply, giving a taxability instruction on jury awards can do no harm, and it can certainly help by preventing the jury from inflating the award and thus overcompensating the plaintiff on the basis of an erroneous assumption that the judgment will be taxable.
After a fireman employed by a railroad suffered fatal injuries in a collision allegedly caused by the railroad's negligence, the administratrix of the fireman's estate brought suit in the Circuit Court of Cook County, Illinois, under the Federal Employers' Liability Act to recover the damages that his survivors suffered as a result of his death. A jury in the Circuit Court awarded the administratrix $ 775,000 after a full trial. On appeal, the Appellate Court of Illinois, First District, held that it was not error for the trial judge to have refused to instruct the jury that "your award will not be subject to any income taxes, and you should not consider such taxes in fixing the amount of your award," and also that the trial judge had not erred in excluding evidence of the effect of income taxes on future earnings of the decedent. Thereafter, the Supreme Court of Illinois denied leave to appeal.
Was it an error for the trial judge to have refused to instruct the jury that "your award will not be subject to any income taxes, and you should not consider such taxes in fixing the amount of your award,"?
The United States Supreme Court reversed and held that it was reasonable to assume that the average juror would believe that a verdict would have been subject to federal taxes, and that juror would have increased any award substantially in order to be sure that the injured party was fully compensated. The Court took judicial notice of the "tax consciousness" of the American public, yet the Court also recognized that few members of the general public were aware of the special statutory exception for personal injury awards contained in the Internal Revenue Code. It was error to refuse the brief, requested instruction in this case. It was not prejudicial to either party but would merely have eliminated an area of doubt or speculation that might have had an improper impact on the computation of the amount of damages.