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Tax Neutralization Adjustment Appropriately Denied, but Door Left Open to Such Approach
By Kimber Cooley, Staff Writer
The Third District Court of Appeal held Friday that where a lump sum payment of damages is apt to bump a prevailing plaintiff into a higher tax bracket, thereby diminishing the value of the award, there’s no right, as a matter of law, to a “tax neutralization adjustment.”
Noting that “[s]everal federal courts have held that the district court may award offset tax payments under statutes authorizing damage awards meant to make the aggrieved party ‘whole,’ ” the opinion does not close the door to California trial courts doing the same, but says that the plaintiff in the case at hand failed to show the tax consequences to her with sufficient specificity.
Plaintiff Jessica Hoglund relied on a report prepared and submitted pre-trial which provided a methodology for the trial court to conduct its own calculation in the event the plaintiff prevailed and was awarded damages, but the preparer of the report was not called to opine as to the proper adjustment after the damages were calculated.
Nevada Superior Court Judge Thomas M. Anderson denied the request for the adjustment, saying “such claim was not supported by sufficient evidence.”
Justice Peter A. Krause authored the opinion which affirmed, in a published portion of the decision, Anderson’s denial of the adjustment. Hoglund challenged the award in a cross-appeal.
The opinion also rejects the defendants’ appeal from the judgment. Presiding Justice Laurie M. Earl and retired Fifth District Justice Rebecca A. Wiseman, sitting by assignment, joined in the opinion.
Age Discrimination
In February 2018, after her employment was terminated, Hoglund sued her former employer, Sierra Nevada Memorial-Miners Hospital, and former supervisor, Rhonda Horne, for age discrimination, harassment and wrongful termination under the Fair Housing and Employment Act, codified at Government Code §12940 et seq.
Hoglund, a phlebotomist at the hospital who was 56 in 2011 when Horne was hired, reported that Horne repeatedly made derogatory comments to Hoglund about her age and treated her differently than younger employees.
In 2016, after Hoglund returned from a leave of absence she had taken in order to care for her sister who was recovering from cancer, Horne continued the pattern of inappropriate comments, saying things such as “[w]e need to hire babies,” “You’ve been here since the dark ages,” “It’s time for new blood,” and “Why didn’t you just retire?”
On July 28, 2022, Anderson found the hospital and Horne jointly and severally liable for the FHEA violations and awarded Hoglund $1,431,800 in damages, comprised of $881,800 in economic damages and $550,000 in emotional distress damages. In January 2023, Nevada Superior Court Judge S. Robert Tice-Raskin awarded her $958,297 in attorney fees and $57,332 in costs.
Appealability of Denial
Krause noted that generally a failure to move for a new trial will preclude a party from complaining on appeal that the damages were inadequate. However, he said that such a failure does not preclude a party from asserting error in the determination of damages such as erroneous evidentiary rulings, instructional errors, or the failure to apply the proper measure of damages.
The jurist pointed out that Hoglund’s cross-appeal challenges Anderson’s ruling declining to award her the adjustment based on insufficiency of the evidence, so that her cross-appeal asks the court to determine whether the report she submitted was “unduly speculative or insufficient as a matter of law.” He concluded that “we may properly consider this question on appeal, and address the merits.”
In doing so, he explained, Hoglund was faced with a “heavy” burden on appeal, as the question becomes whether the evidence in her favor was so convincing as to compel finding in her favor as a matter of law.
Caselaw is Sparce
Turning to the request itself, Krause noted that “California caselaw on this issue…is sparse.”
Citing the 2019 First District decision in Economy v. Sutter East Bay Hospitals, Krause wrote that “one California appellate court has concluded that trial courts can award gross-up damages to offset the tax consequences of lump sum awards in appropriate cases,” if such damages are established with sufficient certainty.
Hoglund’s economic expert, Richard Barnes, issued a pre-trial report detailing Hoglund’s economic damages and suggesting an appropriate award for her past and future lost wages.
Barnes’ report also opined that the trial court should also award her a tax neutralization adjustment as a single large payment would move her into a higher tax bracket for the year, resulting in higher income taxes than she would have otherwise paid had she not been wrongfully terminated.
Methodology for Adjustment
As Barnes did not know the exact amount of damages the court would ultimately award, he calculated an adjustment based on a hypothetical $800,000 award. Using the tax rates for married individuals filing jointly in California, Barnes calculated the taxes that would be due on the hypothetical award in 2020, as compared to the taxes that would be due if the award was spread over nine working years and into retirement.
Barnes concluded that the defendants owed an additional $375,000 under this scenario.
Krause found Barnes’ report insufficient, writing:
“His calculation of the appropriate offset is merely an example, and not a true calculation based on the damages award. Indeed, although Barnes suggests that he would need to provide such a precise, post-award calculation to the trial court for it to assess the proper amount, no such calculation was offered. Rather, his report sets forth only a vague ‘methodology’ for the trial court to conduct its own calculation, without any post-award follow up. Further, the rationale behind Barnes’ methodology is poorly explained.”
The justice continued:
“In general, it appears to be based on numerous assumptions about Hoglund’s income, joint income, and applicable tax rates, yet does not explain the reasons for those assumptions. For example, the report does not explain why he assumes Hoglund has no other sources of income, such as from stock holdings or investments. Nor does it make any reasonable projections about the future.”
He declared: “[W]e are not persuaded that Hoglund provided such clear, detailed, substantial, and unrebutted evidence that she has established her entitlement to the tax neutralization award as a matter of law.”
Attorney Fees
Also in a published portion of the opinion, the award of attorney fees is affirmed.
Krause rejected defendants’ challenge to the awarded fees based on the fact that Tice-Raskin awarded the fees rather than Anderson, who presided over the trial, saying the defendants failed to cite any legal authority rendering the judicial officer change problematic. He was not persuaded that the use of Sacramento hourly rates, based on where Hoglund’s counsel was located, rather than the legal rates in Nevada County to establish the lodestar was illegitimate. Krause said:
“While courts tend to default to the rates in the location in which the case was litigated to determine reasonableness…, the law does not require this approach.”
Krause found the application of a 1.5 multiplier to be reasonable and remarked:
“While using a single factor to increase a lodestar and to justify a multiplier amounts to impermissible double counting…, the trial court here did no such thing. In fact, the trial court was careful to explicitly grant the multiplier due to the contingent nature of the case, which it did not consider when determining the reasonable base rate.”
The case is Hoglund v. Sierra Nevada Memorial-Miners Hospital, C097065.
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