Meredith Construct. Co v. John Alan Holcombe , 21 Va. App. 537 ( 1996 )

COURT OF APPEALS OF VIRGINIA
Present: Chief Judge Moon, Judges Benton and Coleman
Argued at Salem, Virginia
MEREDITH CONSTRUCTION COMPANY, INC.
and AMERICAN CASUALTY COMPANY
OPINION BY
v. Record No. 0135-95-3 JUDGE JAMES W. BENTON, JR.
JANUARY 23, 1996
JOHN ALAN HOLCOMBE
FROM THE VIRGINIA WORKERS' COMPENSATION COMMISSION
Gregory T. Casker (Daniel, Vaughan, Medley &
Smitherman, on brief), for appellants.
Stephen G. Bass (Carter, Craig, Bass,
Blair & Kushner, on brief), for appellee.
The issue presented in this appeal is whether the Workers'
Compensation Commission erred in calculating John Holcombe's
average weekly wage. Meredith Construction Company, Inc.,
contends that the calculation should not have been based upon the
net taxable income, including depreciation, reported by
Holcombe's business. We disagree and affirm the award.
I.
Holcombe was employed by Meredith Construction as a brick
mason when he sustained a compensable injury by accident.
Because of the severity of the injury to his lower back, Holcombe
could not return to his pre-injury employment. After
rehabilitation, he began operating a refinishing business as a
sole proprietor.
When Meredith Construction learned of Holcombe's new
employment, Meredith Construction filed an application for change
in condition. It requested a termination or suspension of
Holcombe's workers' compensation benefits or a credit for
previous payments made to Holcombe. The deputy commissioner
found that Holcombe had experienced an increase in earnings and
ruled that the calculation of Holcombe's average weekly wage
should include consideration of his business' taxable income,
including depreciation expense. The deputy commissioner also
ruled that Meredith Construction was entitled to credit for
overpayments made during Holcombe's self-employment. The
commission affirmed that decision.
II.
Code § 65.2-101 contains the guideposts by which the
commission may base its finding of average weekly wage. 1 When
1
In pertinent part, average weekly wage means the following:
1.a. The earnings of the injured employee in
the employment in which he was working at the
time of the injury during the period of fifty-
two weeks immediately preceding the date of
the injury, divided by fifty-two; but if the
injured employee lost more than seven
consecutive calendar days during such period,
although not in the same week, then the
earnings for the remainder of the fifty-two
weeks shall be divided by the number of weeks
remaining after the time so lost has been
deducted. When the employment prior to the
injury extended over a period of less than
fifty-two weeks, the method of dividing the
earnings during that period by the number of
weeks and parts thereof during which the
employee earned wages shall be followed,
provided that results fair and just to both
parties will be thereby obtained. When, by
reason of a shortness of time during which the
employee has been in the employment of his
employer or the casual nature or terms of his
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the earnings of an injured employee are not amenable to the
primary calculation specified in Code § 65.2-101, "[t]he
commission properly resort[s] to 'such other method of computing
average weekly wages . . . most nearly approximat[ing] the amount
which the injured employee . . . earn[s].'" Dominion Assocs.
Group, Inc. v. Queen, 17 Va. App. 764, 767, 441 S.E.2d 45, 47
(1994)(quoting Code § 65.2-101 ("Average weekly wage" . . .
1.b.). "The reason for calculating the average weekly wage is to
approximate the economic loss suffered by an employee . . . when
there is a loss of earning capacity because of work related
injury." Bosworth v. 7-Up Distrib. Co., 4 Va. App. 161, 163, 355
S.E.2d 339, 340 (1987).
On review from the deputy commissioner's decision, the
commission held that Holcombe's average weekly wage, as a self-
employed person operating as a sole proprietor, "should be based
employment, it is impractical to compute the
average weekly wages as above defined, regard
shall be had to the average weekly amount
which during the fifty-two weeks previous to
the injury was being earned by a person of the
same grade and character employed in the same
class of employment in the same locality or
community.
b. When for exceptional reasons the foregoing
would be unfair either to the employer or
employee, such other method of computing
average weekly wages may be resorted to as
will most nearly approximate the amount which
the injured employee would be earning were it
not for the injury.
Code § 65.2-101 ("Average weekly wage").
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on the net taxable income reported by [Holcombe's] business for
federal income tax purposes . . . [, which] will, of course,
include all allowable expenses, including, but not limited to,
depreciation and interest." The commission's decision follows
the principle announced in one of its previous decisions that an
allowance for depreciation is a legitimate business expense. See
Semones v. New Jersey Zinc Co., 68 O.I.C. 1 (1989). The
commission's decision is also consistent with "the conclusion
reached by the majority of courts which have addressed the
question of whether depreciation deductions should be considered
in determining [average weekly wages for self-employed
individuals] to be awarded as workers' compensation." Elliott v.
El Paso County, 860 P.2d 1363, 1366 (Colo. 1993). See, e.g.,
Happle Solar Contractors v. Happle, 547 So. 2d 1035, 1037 (Fla.
Dist. Ct. App. 1989); Christian v. Riddle & Mendenhall Logging,
450 S.E.2d 510, 513 (N.C. Ct. App. 1994); Nortim, Inc. v.
Workmen's Compensation Appeal Bd., 615 A.2d 873, 875-76 (Pa.
Commw. Ct. 1992).
"'[B]roadly speaking, depreciation is the loss, not restored
by current maintenance, which is due to all the factors causing
the ultimate retirement of the property. These factors embrace
wear and tear, decay, inadequacy, and obsolescence.'" Alexandria
Water Co. v. Alexandria, 163 Va. 512, 564, 177 S.E. 454, 476
(1934) (citation omitted). "'[T]he [depreciation] deduction
simply protects . . . against overstating . . . profits' . . .
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[and is] necessary to accurately determine the appropriate amount
of income of those who are self-employed." Elliott, 860 P.2d at
1365 (citation omitted).
Although we agree with Meredith Construction's argument that
the discussion in the commission's decision concerning Jett v.
Jett, VWC File No. 154-35-14 (January 19, 1994), is inaccurate,
that error is not dispositive of the issue in this appeal.
Properly read, the Jett decision does not reject the principle
that depreciation is an appropriate factor in calculating the
average weekly wage of a sole proprietor. Jett asked the
commission to determine his weekly average wage from the
information contained in Schedule C (Profit or Loss from Business
Statement) that he submitted for federal income tax purposes.
Although the deputy commissioner used the schedule and its
depreciation allowance in computing the average weekly wage, on
appeal, the commission was "more persuaded" that an alternative
method based upon facts in that case gave a more accurate measure
of the average weekly wage.
In determining the average weekly wage of Jett, a self-
employed truck driver, the commission relied on (1) information
in the First Report of Accident which stated Jett's weekly draw,
(2) Jett's testimony that he paid his replacement driver 25% of
the gross income generated by the truck, and (3) the gross income
stated in the schedule. The commission relied on this
alternative method of calculating average weekly wage in Jett
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because the record did not clearly indicate whether other non-
business income was included on Jett's schedule. Thus, although
the commission did not accept Jett's request to use a method of
determining average weekly wage that included depreciation in its
calculations, the commission stated that, on the facts of that
case, a more accurate measure of average weekly wage was
available. The commission's decision did not foreclose in other
cases a method of calculating the average weekly wage that would
include the sole proprietor's depreciation of equipment.
As a sole proprietor, Holcombe must purchase and maintain
equipment to operate his business. Generally, this equipment
will decrease in value over time. Depreciation allows Holcombe
to account for the decrease in value of his assets and recognizes
that Holcombe will need to purchase replacement equipment. The
use of depreciation, thus, allows a more accurate basis to
compute the average weekly wage of a sole proprietor.
The commission's decision requires Holcombe to make
available to Meredith Construction "all books and records of the
sole proprietorship so that income and expenses may be verified."
We believe this requirement complies with the commission's
concerns expressed in Semones that a sole proprietor such as
Holcombe establish that the depreciation is "an actual business
expense."
It was the duty of the Commission to make the
best possible estimate of future impairments
of earnings from the evidence adduced at the
hearing, and to determine the average weekly
wage. . . . This is a question of fact to be
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determined by the Commission which, if based
on credible evidence, will not be disturbed
on appeal.
Pilot Freight Carriers, Inc. v. Reeves, 1 Va. App. 435, 441, 339
S.E.2d 570, 573 (1986).
Accordingly, we hold that the commission did not err in
allowing a reasonable rate of depreciation on the equipment as a
business expense in determining the average weekly wage of
Holcombe, a sole proprietor.
Affirmed.
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