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(e) PRESENT VALUE AND INFLATION Time is a factor in most damage claims A violation typically occurs sometime prior to the loss suffered by the plaintiff; the loss can continue into the future (eg, lost earnings in a personal injury case); the trial can occur either after the entire loss has been suffered or prior to the full recovery from the effects of the violation; and the award may not be paid until sometime after the trial Thus, a damage award must compensate the plaintiff for both past and future losses, but it must be made in full at the present time This requires that the accountant accumulate both past and future lost pro ts to the present This accumulation is accomplished by discounting the projected lost pro ts to the date of violation using a rate of interest and compounding the resulting amount to the present at some prejudgment interest rate The choice of discount rate depends on circumstances A nominal discount rate (such as the Treasury bill rate, the prime rate, or any other market rate) includes both a real rate of interest and an in ation premium If the damages into the future are computed in constant (unin ated) dollars, then discounting at a real rate (net of in ation) may be appropriate If in ation has been built into the projected damage gures, a nominal interest rate is correct In either case, the appropriate discount rate should include an adjustment for risk For more on determining the present value of a damage award, see Kabe and Blonder3 (f) INCOME TAXES Under the law, some damage awards are taxable to the recipient, whereas others are tax-free In computing damages, the goal is to properly account for taxes so the plaintiff is in the same position as it would have been if the liability act had never occurred If the award is taxable, then the damages should be computed on a before-tax basis The plaintiff then receives the damage award, pays taxes, and is in the proper after-tax position If the amount is tax-free, only the fter-tax amount should be assessed as damages Complications arise in the two areas: (1) if prejudgment interest is due, and (2) if tax rates have changed from the damage date to the payment date As discussed above, prejudgment interest is computed on the after-tax amount, since that is the amount the plaintiff would have had to invest However, if the award is taxable, the damages must be expressed in pretax dollars The solution is simple Compute the entire award, including damages and interest, in after-tax dollars Then gross up the award by the tax rate in the year of payment When the plaintiff receives this amount and pays tax on it, plaintiff will be in the proper after-tax position This approach, although accurate, has been relatively untested in court A similar situation arises if tax rates have changed If pretax damages are used, the change in tax rates will result in an incorrect after-tax award The solution is again to compute the after-tax amounts, then gross up the award for the current tax rate.

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