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Published online by Cambridge University Press: 16 January 2009
Although the whole of a man's rights and interests, which include his rights in his own personal safety, may not be readily divisible between his income and his capital assets, it is axiomatic that all those rights and interests are either subject to tax or not. It follows, therefore, that in an action for damages a claim may be made not only for loss of or damage to some non-taxable interest, but also, and perhaps exclusively, for a reduction in the plaintiff's taxable income caused by the wrongful act of the defendant. In such cases the plaintiff's liability to tax may become a relevant consideration, either as between himself and the Commissioners of Inland Revenue or as between himself and the defendant. It is the purpose of this article to consider some aspects of the inter-relationship of damages and tax, with particular reference to the decision of the House of Lords in British Transport Commission v. Gourley and the subsequent Report of the Law Reform Committee.
1 [1956] A.C. 185.
2 Seventh Report (Effect of Tax Liability on Damages). August, 1958. Cmnd. 501.
3 (1927) 12 T.C. 927 (H.L.)
4 A similar principle applies to insurance payments following the destruction of the taxpayer's stock in trade and to War Damage payments when made to a property dealing company: Gliksten v. Green [1929]Google Scholar A.C. 381; London Investment Co. v. Inland Revenue Commissioners [1958]Google Scholar 2 W.L.R. 842 (H.L.). See also Shadbolt v. Salmon Estate (1943)Google Scholar 25 T.C. 52; Johnson v. Try [1946]Google Scholar 1 All E.R. 165.
5 1922 S.C. 112 (H.L.)
6 1931 S.C. 156, 159.
7 British Transport Commission v. Gourley [1956]Google ScholarA.C. 185.
8 Billingham v. Hughes [1949]Google Scholar 1 K.B. 643, affirming Fairholme v. Firth and Brown (1933)Google Scholar 149 L.T. 332.
9 Lord Keith of Avonholm dissenting.
10 This is the fundamental basis of the reasoning in the House of Lords. The detail has been considered elsewhere. See, e.g., Baxter, 19 M.L.R. 365; 72 L.Q.R. 153; Munkman, 106 L.J. 20; 100 S.J. 809, 828, 849; Smith, 1956 S.L.T. 13.
11 At p. 210.
12 Beach v. Reed Corrugated Cases [1956]Google Scholar 1 W.L.R. 807; Re Houghton Main Colliery [1956]Google Scholar 1 W.L.R. 1219. In Phipps v. Orthodox Unit Trusts [1958]Google Scholar 1 Q.B. 314, also a case of wrongful dismissal, the Court of Appeal held that the plaintiff may be required to disclose particulars of his tax liabilities during the interlocutory stage of the action.
13 Hall v. Pearlberg [1956]Google Scholar 1 W.L.R. 244.
14 West Suffolk County Council v. Rought [1957]Google Scholar A.C. 403. Gourley's case has even been applied, in reverse (so to speak), to increase an award of salvage because the recipients would have to pay tax on the award: The Telemachus [1957]Google Scholar P. 47. This decision has, however, not been followed: The Makedonia [1958]Google Scholar 1 Q.B. 365.
15 Hall v. Pearlberg [1956]Google Scholar 1 W.L.R. 244.
16 In the United States, so far as Federal Taxation is concerned, the exemption is statutory: Internal Revenue Code 1954, s. 104 (a) (2).
17 Van den Berghs v. Clark [1935]Google Scholar A.C. 431.
18 (1924) 9 T.C. 48.
19 e.g., Du Cros v. Ryall (1935)Google Scholar 19 T.C. 444; Henley v. Murray [1950]Google Scholar 1 All E.R. 908; Sabine v. Lookers, Ltd. [1958]Google Scholar T.R. 109.
20 (1927) 12 T.C. 955.
21 Wiseburgh v. Domville [1956]Google Scholar 1 W.L.R. 312, 320.
22 See also Shadbolt v. Salmon Estate (1943)Google Scholar 25 T.C. 52; Household v. Grimshaw [1953]Google Scholar 2 All E.R. 12.
23 See below, p. 96.
24 See below, pp. 94–95.
25 Mr. Justice Donovan, Mr. Parker and Professor Wade.
26 Mr. Foster, Mr. Gardiner and Sir David Hughes Parry.
27 Lord Justice Jenkins, Lord Justice Parker (as he then was), Lord Justice Pearce, Mr. Justice Diplock, Mr. Burrows, Professor Goodhart, Mr. Gray, Mr. Megarry and Mr. Morley.
28 Para. 8 (a).
29 Para. 9. This objection is, of course, entirely consistent with the first minority view.
30 The use of this expression here should not be regarded as a pre-judging of the question under discussion.
31 Per Asquith, L.J. in Shearman v. Folland [1950]Google Scholar 2 K.B. 43. See also per Bowen L.J. in Ratcliffe v. Evans [1892] 2 Q.B. 524.
32 (1879) 4 Q.B.D. 406; (1879) 5 Q.B.D. 78; (1879) 5 C.P.D. 280.
33 (1879) 5 C.P.D. at p. 293. See also Billingham v. Hughes [1949]Google Scholar 1 K.B. 643—overruled in Gourley's case, but on a different point. Phillips' case, as was Billingham v. Hughes, was concerned with a professional man paid by fees. For a similar case concerning a wage-earner see Roach v. Yates [1938]Google Scholar 1 K.B. 256.
34 [1953] 1 Q.B. 617.
35 “The damages are in respect of loss of life, not of loss of future pecuniary prospects.” Per Lord Simon L.C. in Benham v. Gambling [1941]Google Scholar A.C. 157, 167.
36 Quantum of Damages in Personal Injury Claims (1954), pp. 84Google Scholar et seq.
37 At p. 91.
38 Richards v. Highway Ironfounders [1955]Google Scholar 1 W.L.R. 1049.
39 Further support for this view is to be found in the cases in which the plaintiff continues to receive his wages although unable to work. (“Wages” does not include payments in lieu of wages such as a disability pension or a sum received under an insurance policy: Payne v. Railway Executive [1952]Google Scholar 1 K.B. 26; Bradburn v. Great Western Railway (1874) L.R. 10 Ex. 1.) In these cases it seems that a plaintiff cannot recover for loss of earnings, though clearly his earning capacity is as much affected as if he had not continued to receive his wages: Receiver for Metropolitan Police District v. Croydon Corporation; Monmouthshire Country Council v. Smith [1957]Google Scholar 2 Q.B. 154.
40 11 & 12 Geo. 6, c. 41.
41 Italics added.
42 [1909] A.C. 488.
43 Per Lord Loreburn L.C. at p. 491.
44 Final Report. June, 1955. Cmd. 9474, paras. 242–252.
45 Ibid., para. 246.
46 Ibid.
47 Internal Revenue Code 1954 s. 104 (a) (2). The general rule in the United States seems to be that the wrongdoer must pay the damages in full. The plaintiff's liability to tax is not taken into account in their computation and the law is thus as it was thought to be in England before Gourley's case. Harper, and James, , The Law of Torts, Vol. 2, p. 1326Google Scholar; Dempsey v. Thompson 251 S.W. 2nd 42 (1952–53); O'Donnell v. Great Northern Railway Co. 109 F.Supp. 540 (D.C.Cal. 1953–54); Runnell v. City of Douglas, Alaska 124 F.Supp. 657 (D.C. Alaska 1954–55).
48 Harnett, Torts and Taxes (1952) 27 N.Y.U.L. Rev. 614, 626.
49 Thus, for example, the practical difficulties referred to in paras. 12–14 would disappear, though they would, perhaps, be replaced by difficulties in assessing the tax to be paid by the plaintiff. As to this see the Royal Commission's Report paras. 247–252. So also would disappear the point (para. 8 (d)) that under the existing law it may be cheaper to repudiate a contract of service than to perform it, and that this is contrary to public policy.
50 e.g., that under the existing law the defendant may escape a portion of his proper liability because the injured party “has got a wealthy wife or a large independent income” (Lord Keith in Gourley's case at p. 216), and that claims which would otherwise be liquidated or for a sum certain become unliquidated because the court has to assess tax liability “by the application of reasonable common sense” (Lord Goddard in Gourley's case at p. 210). Hall, Taxation of Compensation for Loss of Income (1957) 73 L.Q.R. 212. See also T. B. Smith 1956 S.L.T. 13 for the difficulties Gourley's case could cause in a case with a foreign plaintiff.