Kelly B. Niles, by and Through His Co-Conservators, David F. Niles and Joan A. MacMahon v. United States

In this tax-refund suit, the Internal Revenue Service (IRS) appeals from a summary judgment for taxpayer Niles. The novel issue on appeal is whether the IRS may allocate a portion of a lump-sum personal injury award to future medical expenses (resulting from the injury) and disallow deduction of those medical expenses to the extent of the allocation. The district court ruled that the IRS may not make such an allocation. We affirm.

I. Facts and Proceedings Below

The facts of this case are not disputed. In 1970, Kelly Niles, then 11 years old, suffered a head injury during a playground scuffle. Subsequent negligent medical care left Niles with irreparable brain damage. He is now a quadriplegic, unable to speak or take care of himself.

Niles’ personal injury action in 1973 resulted in a lump-sum jury award of $4,025,-000. At trial, Niles presented detailed, substantially unrebutted evidence (including expert testimony) as to each specific component of the total economic loss he claimed as part of the damage award. The verdict was attacked as excessive, but the California Court of Appeal affirmed. Niles v. City of San Rafael, 42 Cal.App.3d 230 , 116 Cal. Rptr. 733 (1974). During…