Elliott v. El Paso County

ELLIOTT, Petitioner, Gerald

v.

EL Industrial COUNTY PASO Appeals Office State

Claim Colorado, Respondents.

No. 92SC718. Colorado,

Supreme Court of

En Banc. 18, 1993.

Oct. Rehearing Nov. Denied Schur, Olive, Schur & Robert Fort Col-

lins, Mullens, P.C., Steven U. Steven U. Mullens, Springs, petitioner. Colorado for Cairns, Gregory Greg- Law Offices B. Cairns, Denver, ory respondent B. El County. Paso Norton, Gen., Atty. Raymond A. Gale T. Gen., Slaughter, Deputy Atty. Chief Timo- Gen., thy Tymkovich, Baird, M. Sol. John Atty. Gen., Denver, respondent Asst. Appeals Indus. Claim Office. delivered the Chief Justice ROYIRA Opinion Court. granted

We certiorari to decide from a whether deducted self- employed as re tax ported on his federal return in the calculation of his should be included weekly wage for deter mining temporary partial the amount of disability he is benefits to which entitled. We conclude that reasonable included calculat deductions should be ing those benefits. we reverse and unpublished remand with directions appeals in Elliott opinion of the court of Office, Industrial No. Claim 1992). (Colo.App. Sept. 92CA0347 I 24, 1986, March Gerald Elliott On (“claimant”) in the course injured his back (i.e., employment partial disability El scope per with Paso benefits $174.98 of his week).3 As a result of this County (“respondent”). injury, awarded workmen’s claimant was Respondent petition filed review on compensation and received tem- benefits grounds improper that it was consid porary disability benefits from March total er claimant’s deduction taken 25, 1986, 11, 1986, April at through in calculating his 1990 tax return his

weekly respon- Because rate of $171.81. average AU, weekly income for 1990. The position dent could not find available relying Equipment on Fireplace v. Petrus capable performing, which claimant was ka, (Colo.App.1990),agreed employment he not his did resume with supplemental 22, issued a order on October following Rather, respondent injury. his 1991, revising temporary her calculation began a dump he his own truck business partial disability supplemen benefits. The operator and maintained business from post-injury tal order set average claimant’s through weekly wage at based on his $137.98 $7,175 by fifty-two divided 1990, January petition claimant filed a Subtracting weeks. that amount from his reopen compensation his workmen’s pre-injury average weekly wage $311.80 fraud, claim alleging mistake and worsen- two-thirds, and multiplying by that amount hearing, of condition.2 After a the AU concluded that claimant was enti Judge (“ALJ”) Administrative Law ordered per tled to $115.88 week benefits. reopened claimant’s case based on medical establishing evidence that his condition had appealed supplemental Claimant or worsened. The AU determined that re- der to the Industrial Claim Panel spondent pay temporary should claimant (“ICAP”) which appeal affirmed. He then partial disability February benefits from ed the ICAP’s decision to the ap court of 1990 to the a rate per at of $174.98 peals. appeals The court of affirmed stat by week. This amount was calculated first ing: previously “Our court has ruled that taking average weekly wage claimant’s depreciation is not deductible from earn earned employed respondent while with ings in computing average a claimant’s ($311.80) subtracting from that amount weekly wage. Fireplace Equipment v. Petruska_ post-injury earnings claimant’s from his persuaded not We are trucking argument business as disclosed on his claimant’s that Petrusha was er roneously inapplicable federal income return. decided or that it is tax The AU deter- Slip op. here.” at 2. earnings by mined taking his $7,175 gross profit his subtracting $4,610.

the claimed II the AU post- concluded $2,565 injury annual income 1990 was 8-51-103, (1986), Section 3B C.R.S. of the or, per week. AU then $49.32 sub- provided workmen’s act average tracted weekly from $49.32 partial case of temporary disability, “[i]n employed respon- earned while employee sixty-six shall receive dent which resulted a difference of percent impairment two-thirds of his earning The AU then awarded claimant capacity during $262.48. the continuance thereof_” in temporary Earning capacity two-thirds of that amount is calculat- effect, Compensation 1.See Workmen's Act of Colora- Act was in all herein citations will refer do, -54-127, (1986). §§ 8-40-101 to 3B C.R.S. Compensation to the Workmen’s Act of Colora- repealed The Act and reenacted was do. Act, Assembly General in 1990. The retitled Compensation now known as the "Workers’ Act 8-53-113, (1986). 2. See § 3B C.R.S. Colorado,” at §§ is codified 8-40-101 to -47- (1993 Supp.). Since 3B C.R.S. 8-51-103, 3. See § 3B C.R.S. pre-1990 filed his claim while the version of the ed, part, by assessing self-employed may week- reduce their taxes.” depreciation simply Nor is ly wage during arbitrary earned “an disability. encourage general factor intended to period temporary partial Un- (1986), economy 8-47-101(4), within scheme of taxation.” der section 3B C.R.S. Petrusha, Rather, 796 P.2d at 76. the al- for when the enumerated methods calculat- lowance for a weekly wage deductions is ing average a claimant’s method a by expenditure which for fairly compute average will not the week- long-lived property may business recov- be division, particular ly wage, in each the time, period ered over of opposed case, compute weekly the being single in recovered as a busi- in such wage employee of said other expense. ness by manner and such other methods as essentially serves the same will, opinion the director in the of based function as the deduction for such busi- present, fairly determine upon the facts rent, interest, expenses wages, ness weekly employee’s average wage. such taxes, and property except that the al- clear, provision As the determi- makes single year lowance not deductible in is average weekly of a claimant’s nation spread is but instead out a number over compensate wage must be fair so as to the years. of earnings. claimant for actual loss of See McMahon, Jr., Boris I. Bittker & Martin J. Services, Skycap Romero v. U-Let-Us Federal Income Taxation Individuals Inc., (Colo.App.1987). of (1988). at 12.1 12-3 argues allowing Respondent that for de- purchasing dump of truck preciation determining post- in a claimant’s period is over a time be- recoverable figure injury income results in a that “is presumed cause it that life is is its useful earnings.” not reflective his actual protracted, other in- expenses whereas are Thus, depreciation not be included should items, gasoline, curred for such as that are determining the amount of income presumed to be consumed at once. See calculating temporary partial when disabili- Chommie, Michael D. Rose & John C. Fed- ty benefits. See Broussard v. Zim’s (3d 3.22, eral Income Taxation at 157 §§ Serv., Inc., Alignment 488 So.2d 1988) (“In theory, purpose ed. (“The money (La.App.1986) sum of not deduction is to distribute [a] taxed because of an systematic rational manner the cost depreciation machinery for allowance or Compare property.”). I.R.C. 167-68 §§ equipment merely used to induce the Consequently, with I.R.C. § investor to continue in his business and essentially serve the same tion deductions accurately profits does not reflect or function for as deductions other business losses.”). respondent Consequently, con- expenses; being difference account- properly cludes Petrusha was decided arriving appro- at the method used controlling disagree and is here. We priate figure decreasing one’s accordingly, reject contention first such, simply income. As deduction “[t]he the second. against overstating protects taxpayers J. profits.”

their Boris I. Bittker & Martin A McMahon, Jr., Taxation Federal Income at 12.1 12-3 Individuals respondent’s assertion, Contrary allowed under the federal in- deduc Because reasonable code, 167-68, accurately see does necessary come tax tions are determine §§ princi- merely represent not of those appropriate “an amount such ple accepted by Congress self-employed, are which has been who follows account taken into as a means which individuals who are deductions should be determining relationship self-employed the amount of a claim to a when average weekly wage average weekly ant’s income. purposes awarding benefits under the Therefore, reject holding we of Pe- short, workmen’s act. primary authority and the trus ka relied on earnings must be considered in mea cost of rendering that decision—Broussard v. suring earnings. those This is the conclu Service, Inc., Alignment Zim’s 488 So.2d majority sion reached of courts (La.App.1986) (depreciation question have addressed the which nothing inducing more than a means of depreciation deductions should whether business). continuance of one’s We elect to determining proper considered the majority requires follow rule which amount of benefits to be awarded as work depreciation be in considered determin- See, compensation. e.g., ers’ Backaus v. temporary partial the amount of dis- Lines,

Murphy Freight Motor 442 N.W.2d ability to benefits which a claimant is enti- 326, (Minn.1989)(“computation 327 of the tled to receive. To the extent that Petrus- employee’s wage recog must include some conclusion, ka is inconsistent with this it is employee’s capital return nition overruled. investment”); Express, Sper D & C Inc. v. (Iowa 1990) ry, (holding 450 N.W.2d 842

depreciation in to be one factor used deter B purposes mination of taxable income for conclusion, reaching this we do calculating average weekly wage from self- per depreciation not establish a se rule of employment); Florida Timber Products v. simple deduction for the reason that it 422, Williams, (Fla.App. 459 So.2d 1 manifestly would unjust require, in Dist.1984) (reasonable depreciation attrib circumstances, any depreciation all de equipment prop utable claimant’s was a duction taken on a claimant’s income tax er business to be deducted from computing post- return be considered in gross receipts determining claimant’s in injury average weekly wage. The amount average weekly wage); v. Baldwin Pied 602, depreciation of a Woodyards, N.C.App. mont deduction must bear some 814, (1982) logical relationship (though deprecia self-employed S.E.2d 815-16 to a earnings tion allowed the Internal Revenue claimant’s actual diminution in Ser may precisely capital vice not coincide actual expenditures. result Conse depreciation, it must from quently, only be deducted self- we hold that a reasonable employed gross earnings); depreciation claimant’s Nor deduction should be consid trim, Compensation Inc. v. calculating Workmen’s ered in a claimant’s Bd., 196, Appeal Moreover, average weekly wage. Pa.Cmwlth. 615 A.2d because 873, (1992) (depreciation 875-76 should be showing bears the burden of gross earnings deducted from calcu statutory compensation when entitlement to lating average weekly wage evidence, by preponderance for workers’ Olson benefits). compensation Erickson, See also Licor v. v. 105 Colo. 99 P.2d 199 Auth., (1940), Washington Tunnell, Metro. Area Transit 108 Colo. Wierman (D.C.Cir.1989), (1941), 879 F.2d 901 and 2 Arthur burden estab Larson, Compensation lishing depreciation Workmen’s Law the reasonableness of 60.12(e) opinion purposes We are of the deductions for of workers’ com authority properly pensation construes the benefits also must rest with depreciation nature of deductions and their claimant.4 showing require deprecia- 4. Such a does not a claimant to In the event that a claimant declared justify prescribed by methods tion deductions to he was not entitled which pur- the federal laws, for income tax under the federal income tax it would be poses. contrary, merely requires To the inequitable to allow such deductions to be used any claimant to show that claimed diminishing post-injury average a claimant's deductions in fact conform to those methods. case, Colorado, 8-47-209, initially 8-40-101 to In the the AU 3B §§ (1986 Supp.), per C.R.S. & 1993 claimant week ben- obtain $174.98 awarded credit amounts he which deducted as federal income tax on his 1990 efits based gross from his income on his That shows that claimant return return. federal tax return computing when his av- depreciation deductions of total took erage post-injury weekly wage. The ma- $4,610. presented, was No evidence how- jority holds must be consid- ever, which established what that in determining ered the claimant’s for, any nor deduction was was evi- post-injury weekly part wage in IIA of the concerning presented the reasonable- dence opinion. I in part majori- concur IIA. The subtracting that ness of deduction full ty also holds the deduction income for from logical relationship must bear “some to a Consequently, the AU must reconsider her self-employed claimant’s actual diminution of workmen’s award benefits expendi- result of light legal standards set forth tures” and remands the case determine show, by pre- and claimant must above if the deduction was reason- evidence, ponderance inequity placing able. Because reasonably tion deductions which should be justify burden on in calculating included his benefits. government method federal the uses to cal- depreciation, part culate I dissent to IIB. C recognizes The majority correctly that reasons, foregoing For the we reverse depreciation is an for method of decision and appeals the court remand capital allocating a asset’s cost its over the case to that court with instructions to Accepted useful Generally life. Account- to the Industrial Claim return Of- (GAAP) ing Principles require sys- that recompute the fice for remand to AU to procedure tematic and rational be used to compensation periods during the amount of workmen’s expenses allocate to the to which claimant is entitled expected benefits in which the related assets are Miller, conformity opinions expressed provide A. with the Martin GAAP benefits. recog- 11.01 Guide GAAP herein. 1991 § range depreciation nizes a of meth- broad straight and de- including ods line double ERICKSON, J., part concurs in and clining 11.04 11.09. Id. at balance.1 §§ SCOTT,J., part, joins in in dissents and the deprecia- utilizes a The federal concurrence and dissent. tion on a combination of the model based declining straight balance and line double concurring part Justice ERICKSON 168(b)(1). system models. I.R.C. § dissenting part: and as the Modified Accelerated referred to granted This court certiorari to decide (MACRS). Recovery System In addi- Cost self-employed claiming person using whether a tion to calculated partial disability pursu- temporary MACRS, taxpayer is also allowed to benefits Compensation expense first Act of an additional amount ant to Workers’ and, wage using weekly correspondingly, purpose increase the 1. The of an accelerated method, declining tion such as the double bal- amount workers’ benefits method, correctly only fact that show ance is to reflect the awarded. need that expected productivity revenue are some claimed deductions allowable assets’ during carry greater earning power are the earlier tax laws in order to his under addition, proving years mainte- deductions are the assets’ life. In burden that those Moreover, during may possibility the assets’ expenses nance increase reasonable. because the arise, depre- employer is life. two factors make accelerated error or fraud an free These any showing best model for cost allocation evidence to rebut ciation the many such deductions are reasonable. situations. counting Placing placed theory. an asset is service. I.R.C. burden on section 179 179. The total of is unfair. § and MACRS Congress principle purposes had two taxpayer amount that a deducts from his replacing more traditional gross income on his federal tax return.2 methods with cost recovery an accelerated view, first, my system: Fireplace Equipment v. Pe traditional rules truska, (Colo.App.1990), complex was were too involved many too wrongly ignores disputes “inherently decided because the fact about uncertain” val- expenses salvage value; that a business incurs as a result ues of useful life and second, purchasing equipment. accelerating recovery Even if the cost was de- aby taxpayer depreci signed amount deducted to encourage investment.3 S.Rep. Cong., ation on his federal income tax return does No. 97th 1st Sess. 47 (1981) depreciation expense Cong. not allocate properly, U.S.Code & Admin.News expense ignored. major By failing change cannot 105. MACRS’s to tra- adopt expense recogni some method of ditional accounting proper- methods is that allocation, ty tion and the court in categories is classified into desig- Petrusha which adopted of computing “recovery period” a method a claim nate an asset’s and all earnings presumed ant’s assets are salvage overstates not to have undercompensates By and thus value. creating catego- types claimant. ries for personalty and eliminating value, concept salvage Congress di- recognizes majority Once the disagreements minished frequent be- purchasing an asset has to be taxpayers tween IRS about the allocated over the asset’s life and deducted useful life salvage specific value of from post-injury income to determine assets. earnings, question the is whether the feder- allocating al method of the expense of the For the class of asset at issue in this case, asset is reasonable. The majority requires MACRS the use of a five year remands the so the recovery period. case administrative law Two traditional ac- judge (AU) can counting depreciation make this determination models for are then places applied the on the yield depreciation burden claimant to to the for each justify year. the federal method used for calcu- The net result of calculation is lating depreciation expense. depreciation greater What that the the ma- in the is first jority requires years the claimant to do is to the asset’s life and then levels out justify government’s the federal method of for the remainder of the asset’s life.4 The calculating depreciation early recognition expense as a matter of ac- is further in- majority figure years any 2. The the notes that the claimant service and in that the excess deduc- depreciation in this case deducted on tion is carried I.R.C. § forward. 179. $4,610. federal income tax return was This figure aggregate is the derived from year of the 4.The five life ascribed to the asset the depreciation. straight section 179 MACRS I.R.C. means under the line method taxpayer (.20) computes aggregate year The the deprecia- each of the asset’s life one-fifth using depreciation. tion deduction IRS form basis would be allowed as 4562. The The declining multiplies claimant filed form 4562 in double method 1990 and arrived at balance $4,610. figure percentage applicable the twice the would This form was used that if as evi- utilized, straight (i.e. the judge. dence line method were the administrative law x = .40), depreci- .20 to the determine the basis to year. ation for each difference The between Adopting depreciation 3. an accelerated model straight these two methods is the line method encourages capital expenditure by allowing a recognizes equal expense year an each while the expense large portion business to a of an asset declining recognizes double method balance company when the first uses the asset. In ef- largest depreciation year; first in each fect, by purchas- a business can offset revenue subsequent year depreciation diminishes. ing capital assets. The investment incentive is amplified by applies declining 179 which section increases the MACRS the double balance depreciation placed straight in the the asset is method line until the method would recognize hypocriti- to follow it is irrational taxpayer if a elects because is creased opportunity cal. I would not foreclose the 179. depreciation. I.R.C. section prove matching that closer to a of revenue Thompson Wil- generally Steven C. & See expense possible is under a different Regulations Final Simpson, liam R. Offer model, the claimant but should not bear the Depreciable As- Expensing Guidance for unraveling burden of a theoretical debate sets, 309; Beehler, M. Taxes John recognition. expense Assets, Depreciable Tax Expensing Adviser I would hold that once a claimant offers depreciation expense evidence of his under majority requires The the claimant to model, any including reasonable the federal prove depreciation deduction bears that model, showing he has met the burden logical relationship to the claimant’s some he is entitled a to deduction result of actual diminution party tion.5 If the opposing the claimant capital expenditures. espoused The test asserts the federal model does not depreciation be majority is that proper matching result recogniz- The federal model of reasonable. asset, revenue over the life of the it would is not unreasonable or ing depreciation an opposition’s burden to be the evi- match illogical attempting method of to dence of more effective model.6 Congress has deter- expense. revenue and sufficiently logi- mined the method is adopted government The fact federal taxpayers comply to with it require cal MACRS, accessibility to the claimant’s and, although for se- part of the rationale statistics, benefit of lecting encourage invest- the model was to forcing compare not ment, on standard models. The based federal method to other meth- federal model not be the best ods makes the federal model a reasonable model, claim- but to refuse to allow a determining mechanism for system earnings.7 of accounting calculating ant to use a the when requires majority opinion taxpayers federal forces allowance; larger represent proper yield point once this return does not allocation of reached, expense. purposes straight replaces line When for tax method declining from for financial account- double balance method. differs company 168(b)(1). ing purposes, requires a GAAP Under convention § year property placed a of difference. Account- is in service for half a maintain record Taxes, ing period year half a after the last for Income Statement of Financial the first (Fin. 168(b)(2)(B), Accounting Accounting period, percentages Standards No. 96 addition, = .20; .32; Bd.1991). = a claimant 2 Standards if are: Year 1 Year each = .192; .1152; .1152; = = large is has section 179 deduction which car- a Year Year 4 Year 5 3 forward, = improper (Compare ried could ex- percentages result Year .0576. under 6 pense purely following half-year straight allocation because section 179 line method .10; = .20; = policy encouraging of federal of Year result a convention: Year 1 Year .20; = .20; .20; capital = = = opposing party could Year 6 investment. Year Year 5 eliminate the effect of the section 179 deduction .10). using compute only oppos- Only group a last would an as a not benefitted MACRS. resort 5. Claimants are ing complex pro depreciation. party forma adopting It have to delve into the federal model of possible argue based on useful life that when MACRS is com- calculations method, salvage necessary straight under tra- pared a claimant value that are to the line early years expensing methods. who files a claim in of ditional capital overcompensated. asset is Based method, comparison straight line how- with the proper allocation of the of 7.The ever, nature MACRSmeans if a claimant capital the asset creates is asset to the revenue years expensing files in the later subjects confusing in account- one of the most undercompensated. asset he would be Accounting theory. Handbook Modern 1970) ("On subject (Sidney no Davids ed. opposing much written and party a number has there been so 6. The claimant has subject depreci- options attempting prove so confusion on the much ation.”). a claimant on federal tax deducted raise, resolve, complex an AU to is- designed

sues the model federal was

avoid—a determination useful life

salvage required other value only

tion methods. This can con- create disputes ap-

stant and wasteful court over

plication of theoretical models. I

Accordingly, In- would remand to the

dustrial Claim Office di-

rections to remand to AU so the AU supplemental

can vacate her order dated and,

October in the absence of

conclusive evidence of a better estimate than the deducted

from the claimant’s 1990 federal tax re-

turn, with origi- directions to reinstate the

nal order temporary partial disability

benefits dated June

SCOTT, J., joins this concurrence and

dissent. Colorado,

The PEOPLE of the State of

Plaintiff-Appellee, MENDOZA, Defendant-Appellant.

Jesus

No. 91CA0318. Appeals,

Colorado Court of

Div. IV. 11,

March 1993.

Rehearing Denied April Judgment

Certiorari Granted and

Vacated Oct. 1993.* * Cerrone, (Colo. light People Petition for Writ of Certiorari GRANTED P.2d judgment appeals 1993.). court is vacated. case is remanded for reconsideration

Case Details

Case Name: Elliott v. El Paso County

Court Name: Supreme Court of Colorado

Date Published: Oct 18, 1993

Citation: 860 P.2d 1363

Docket Number: 92SC718

Court Abbreviation: Colo.