Determining a person’s earning capacity is crucial when establishing damages as part of a personal injury or wrongful death lawsuit.  However, quantifying earning capacity can be more complicated than one might think.  Typically, the starting point is reported income (i.e. the income reported on a tax return), but certain factors may exist that could render reported income an inaccurate measure.  In these cases, it may be necessary to calculate earning capacity using different methods, or by adjusting reported income.  Even for the same individual in the same year, the calculations of reported income and earning capacity can result in much different conclusions, as you will see below.

Introduction

“Mr. Woods and Mr. Mickelson are here to see you,” the law firm receptionist’s voice came over Jane Wu’s speakerphone.  Something in her voice warned Jane that this would not be an easy meeting.  As Eddie Woods and Paul Mickelson were making their way to her office, Jane thought back five years to the time a retiring partner had passed their file on to her.  “These are two golfing buddies who are living their dream,” he’d told her as he packed up his bookshelf.  “They’ve built Augusta Greens into one of the best courses close to the city.  Paul put up most of the money and Eddie loved operating the course.  They’ve always worked well together.”

But now with the two sitting in her office, Jane thought that the two looked like an elderly married couple in the first stages of a divorce.  “Eddie wants to sell out to an interested developer and I don’t – at least not yet,” said Paul.  “He says we can sell it for $10 million.”