In Susan Orillion v. Crawford, 2005-0559 (La. App. 1 Cir. 9/1/06), 2006 WL 2521450, Orillion disputed the imposition of Louisiana individual income taxes on prejudgment interest received in connection with an automobile accident in 1988. The state paid its half of the damage award judgment in connection with the accident, with accrued judicial interest. Relying on tax laws current at the time, the Orillions paid no state or federal income taxes on their damage awards.
As described by the court, “The issue of whether prejudgment interest was taxable under 26 U.S.C.A. §104(a)(2) came to the forefront in federal court beginning with an unpublished case arising out of Michigan, entitled Kovacs vs. C.I.R., 25 F.3d 1048 (6th Cir. 1994), cert. denied, 513 U.S. 963, 115 S.Ct. 424, 130 L.Ed.2d 338 (1994). It was quickly and subsequently followed by a series of cases that held that prejudgment interest was not excluded from taxation under 26 U.S.C.A. §104(a)(2).” Thus, beginning in 1994 the treatment of prejudgment interest for federal tax purposes became clear. Orillion, however, contended that La. R.S. 47:46 precluded the imposition of the Louisiana individual income tax on prejudgment interest. In pertinent part, La. R.S. 47:46 provides, “gross income does not include: * * * (2) the amounts of any damages received (whether by suit or agreement) on account of personal injuries or sickness * * *.”
The Department argued that La. R.S. 47:46 had been superseded by the provisions of La. R.S. 47:290 et seq. Consistent with this position, the Department has historically argued that except for modifications contained in La. R.S. 47:290, et seq. the Louisiana individual income tax liability is derived directly from the federal income tax liability.
In the Orillion case, the court determined that La. R.S. 47:290, et seq. superseded the pre-existing provisions of the individual income tax law only to the extent that the provisions of the pre-existing individual income tax law were expressly inconsistent with the provisions of La. R.S. 47:290, et seq. Rather, the court found that La. R.S. 47:293(6)(a)(iii) (allowing for adjustments for income exempt from taxation under Louisiana law or which Louisiana is prohibiting from taxing by the Constitution or laws of the United States) appears to reaffirm exemptions from taxation under other provisions of Louisiana law, which necessarily includes La. R.S. 47:46.
The court then concluded, “under Louisiana law, prejudgment interest is part of personal injury damages and is specifically excluded from gross income.”