# Appendix — Randall v. Loftsgaarden > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0440%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1986 - **Citation:** 478 U.S. 647 ## Text < t , 85 as 5 1 9 | Supreme Court, U.S, 7 | FILED a No. SEP 24 1908 = “SPANIOL, JR. IN THE am CLERK Supreme Court of the Anited States October Term, 1985 DR. WILLIAM C. RANDALL, DP... ROGER E. AUSTIN, DR. TOM W. ANDERSON and DR. MYREL A. NEUMANN, Petitioners, v. B. J. LOFTSGAARDEN; ALOTEL INCORPORATED, a Minnesota corporation; PROPERTY DEVELOPMENT AND RESEARCTI COMPANY, a Minnescta corpora- tion; and 2361 BUILi2ING CORPORATION, a Minne- sota corporation, Respondents. APPENDIX Robert Arthur Brunig O’CONNOR & HANNAN 3800 IDS Tower 80 South Eighth Street Minneapolis, Minnesota 55402 Telephone: (612) 343-1200 A‘torney for Petitioners Of Counsel: Terence M. Fruth FRUTH & ANTHONY, P.A. 1300 International Centre 900 Second. Avenue South Minneapolis, Minnesota 55402 Telephone: (612) 3249-6969 1985—Northwest Brief Printing Co., 3010 2nd St. No., Minneapolis 55411—588-7506 APPENDIX INDEX Page Decision and Judgment (8th Cir. Jul. 1, 1985)....... A-l Amended Judgment (D. Minn. Mar. 26, 1984)...... B-1 Order (D. Minn. Feb. 22, 1984).............00005 C-1 Decision and Judgment (8th Cir. Apr. 7, 1982)...... D-1 Findings of Fact, Conclusions of Law and Order for Judgment (D. Minn. Aug. 15, 1980)............ E-1 Memorandum Order (D. Minn. Aug. 15, 1980)...... F-1 SORES GS DED ce ccc ic ce rtesewecessesds G-1 A-l APPENDIX APPENDIX A UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT No. 84-5053 No. 84-5058 No. 84-5059 Dr. Roger E. Austin, Dr. Tom W. Anderson, Dr. Myrel A. Neumann, and Dr. William C. Randall, Appellees, Vv. B. J. Loftsgaarden; Alotel Incorporated, a Minnesota cor- poration; Property Development and Research Com- pany, a Minnesota corporation and 2361 Building Cor- poration, Appellants. Appeals from the United States District Court for the District of Minnesota Submitted: January 17, 1985 Filed: July 16, 1985 Before LAY, Chief Judge, and HEANEY, BRIGHT, ROSS, McMILLIAN, ARNOLD, JOHN R. GIBSON, FAGG, and BOWMAN, Circuit Judges. A-2 PER CURIAM. This en banc hearing arises from a retrial on the issue of damages ordered by this Court in Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir. 1982) (Austin I). In Austin I, we affirmed the jury’s verdict that Loftsgaarden and three of his closely-held corporations (hereinafter Loftsgaarden) violated state and federal securities laws, but held that the district court erred in ruling that the plaintiff-investors’ rescissionary damages could not be reduced by the “tax shelter™ benefits they received as a result of their invest- ments. Thereafter, we denied plaintiffs’ petition for re- hearing or rehearing en banc. On remand, the district court deducted plaintiffs’ tax benefits from their damage awards and both sides appeal. After oral argument before a panel of this Court, the pan- el issued an order setting two issues for en banc consideration: First, whether Austin I should be recon- sidered as it relates to the offset of tax benefits fron: rescissionary damages awarded in a private securities fraud action involving an investment that was structured and marketed as a tax shelter; and second, assuming that Austin I was properly decided, what is the proper measure of plaintiffs’ rescissionary damages? ‘In Austin I, we defined “tax shelters” as investments which allow the investor to offset certain “artificial losses” (that is noneconomic losses but losses which are available as deductions under the present tax laws) not only against the income from those investments but also against the [investor's] other income, usually from his regular business or professional activity. 675 F.2d at 183 (citing Staff of Joint Comm. on Internal Revenue Taxation, 94th Cong., Ist Sess.,. Overview of Tax Shelters 1 (Comm. Print 1975) ). A-3 FACTS The facts in this case are set forth in detail in Austin I, 675 F.2d at 173-76. We briefly review them here. Plaintiffs Austin, Anderson, Neumann and Randall, in- vested over $152,000 in Alotel Associates (hereinafter Associates), a limited partnership organized by defendant B. J. Loftsgaarden to help finance the building and oper- ation of a Ramada Inn in Rochester, Minnesota. Lofts- gaarden’s offering memorandum claimed that purchasers of the limited partnership interests would receive sub- stantial tax benefits during the first three years of their investments and thereafter would share in the hotel’s pro- jected profits. The Rochester Ramada opened several months behind schedule in 1974 at a construction cost substantially in ex- cess of that projected. Thereafter, the ho‘el incurred sig- nificant operating losses and Loftsgaarden requested the limited partners to extend to Associates several large loans to prevent insolvency. The limited partners hired a lawyer and an accountant to investigate Loftsgzaarden’s stewardship of the project, which revealed that Lofts- gaarden had knowingly committed several frauds on the limited partners. Although Loftsgaarden resigned as gen- eral partner and the limited partners made additional loans,’ the partnership ultimately defaulted on its obliga- tions and the hotel was foreclosed upon. The four plaintiffs’ then filed this securities fraud action *The jury found that these advances w_-e not induced by any misrepre- sentations by Loftsgaarden and thus the plaintiffs could not recover them. *The numerous other limited partners were initially parties to this action but subsequently dropped their claims. A-4 against Loftsgaarden. The jury found that Loftsgaarden had violated “section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. 240.10b-5; the antifraud provision of the Minnesota Se- curities Act, Minn. Stat. §§ 80A.01, et seg., 80A.23; and [had committed] common law fraud. The jury rendered an advisory verdict—in which the district court con- curred—that defendants were liable for violating § 12 (2) of the Securities Act of 1933. 15 U.S.C. § 771(2).” Austin I, 675 F.2d at 172 (footnotes omitted.) The court applied a rescissionary measure of damages in the amount of the consideration each plaintiff paid for his limited part- nership unit or units, prejudgment interest from the date of purchase, and attorneys’ fees for plaintiffs Randall and Neumann for a total judgment of $273,720. We affirmed the findings of liability, but vacated the award of damages and remanded to the district court, stating “the court committed reversible error in refusing to allow proof of any economic benefits received by plaintiffs on account of the investment and in failing to in- struct the jury that the damage award must be reduced by any value shown to have been received by plaintiffs.” Austin I, 675 F.2d at 181. On remand, the district court awarded to plaintiffs damages in the amount of their consideration paid, with eight percent interest thereon, less tax benefits received, for a total amount as follows. Anderson, $35,172: Austin, $31,277: Neumann, $39,371: and Randall, $31,569. It also granted attorneys’ fees under Minn. Stat. § 80A 23, subd. 2 as follows: Anderson, $0; Austin, $0; Neumann. $29,000; and Randall, $20,000. In addition, the court granted costs of $5,321.83 to Austin, Anderson and A-5 Neumann and $2,955.49 to Randall. We now consider the two issues raised before the Court en banc. DISCUSSION I. Should Austin I be reconsidered as it relates to the- Offset of tax benefits from rescissiOnary damages awarded in a private securities fraud action -in- volving an investment structured and marketed as a “tax shelter”? The starting point for our analysis is that the petition for rehearing or rehearing en banc in Austin I was de- nied, 675 F.2d at 168, and that, accordingly, its holdings are now law of the case. As we stated in Otten v. Stonewall Ins. Co., 538 F.2d 210 (8th Cir. 1978): Law of the case principles have heen stated with clarity and consistency in this court over a long period of time. “This court has repeatedly he'd that the de- cision on former appeal is the ‘law of the case’ on a question presented in that former appeal, unless the evidence introduced at the subsequent trial is sub- stantially different from that considered on the first appeal, and must be followed in all subsequent proceedings in such case in both district and appel- late courts unless that decision is clearly erroneous and works manifest injustice. * * * While this rule of practice is not a limit of power, it is nevertheless a salutary one, and should be departed from only after careful consideration of situations arising in spe- cific cases.” Id. at 212 (citations omitted). The appellees contend that the damages holding in Austin I is “clearly erroneous” and works a “manifest in- justice” and thus should be reversed. After a careful review A-6 of Austin I, the relevant cases, the arguments of the par- ties and the Tax Division of the Justice Department and the Securities and Exchange Commission, appearing as amicus curiae, we abide by our previous decision. In doing so, we note that since our opinion in Austin I, the United States Court of Appeals for the Second Circuit has sub- stantially adopted the views that we expressed in that case. Salcer v. Envicon Equities Corp., 744 F.2d 935 (2d Cir. 1984).° Our decision in Austin I was based on the principle that: “[DJamages for securities fraud are determined in accordance with the extent to which false and mislead- ing information actually harmed the complaining party.” Austin I, 675 F.2d at 180 (citation omitted). We noted that for this reason, the courts typically used the out-of-pocket measure of damages,” but that where a rescilssionary measure of damages is applied, the “ac- tual damages principle requires that a_ rescissionary * * * award be reduced by any value received as a result of the fraudulent transaction.” Austin I, 675 F.2d at 181 (citation omitted). We held that this principle applied not only to the 1933 Act claims and the claim under Minn. Stat. § 80A.23(2),° (both of which explicitly *But cf. Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984) (apply- ing different rule in case of actual rescission). °The parties are in dispute over whether the out-of-pocket measure of damages would ea recovery similar to that approved here. See Salcer, 744 F.2d at 940 n.5, Brief of SEC at 22-23. We need not address this issue, however. Austin I limited its holding to tax shelter — \ om a recissionary measure of damages is applied. 675 F.2d at 183. “In Hayden v. MacDonald, 742 F.2d 423 (8th Cir. 1984), plaintiffs brought claims under Minn. Stat. § 80A.23(1), which provides that, in an action for rescission and restitution based on the nonregistration of securities in Minnesota, “the purchaser shall be entitled to recover the consideration paid for the security * * * less the amount of any income received on the security.” Because the Minnesota courts had not directly addressed the issue, we deferred to the district court's interpretation of “income received” as not including tax benefits. Id. at 440-41. We now overrule that decision. A-7 limit damages to the “actual damages” sustained), but also to the common law fraud claim’ and the claim un- We do not believe that Minnesota could have intended to treat fraudulent sellers more kindly than those who have simply neglected to register their securities. Although the phrase “actual damages” does not appear in subsection (1), the principle that a plaintiff should not be placed in a better position than he would have been in but for the fraud — the principle, in other words, that no recovery in excess of actual damages should be permitted — is plainly implicit in that pro- vision. In actions for rescission based on sales of unregistered securities, the statute says, “the amount of any income received on the securities” is to be subtracted from “the consideration paid for the security together with interest” in computing damages. Moreover, to allow greater recoveries under subsection (1) than under subsection (2) leads to results that are anomalons in the extreme. Subsection (1) governs not only simple actions for sale of unregistered securities (arising under Minn. Stat. §80A.08), but also actions for misrepresenting that registration of a security means that state officials are recommending that security (a practice made unlawful by Minn. Stat. §80A.18). Otherwise, a defendant who tells a buyer that the filing of a registration statement means that the Commissioner of Commerce is recommending purchase of the security registered would be liable for the full amount of consideration paid, and would receive no credit for tax benefits conferred on the buyer, however substantial. But a defendant who commits some other kind of fraud, however flagrant, would receive such credit, solely because the action against him arises under §80A.23(2) instead of §80A.23(1). The Minnesota Supreme Court, of course, can resolve this matter authoritatively and have the last word on the subject. Our brother Heaney, post p. 26, takes the position that “it is bad policy” to reach the Hayden issue because it “was not presented to us vy the parties” and “we need not decide” it. We would like to explain briefly why we disagree with this statement. The Court en hanc was convened to decide whether we should adhere to the panel's decision in Austin I. Plaintiffs, seeking disapproval of Austin I, argued that it was inconsistent with Hayden. We agree. The logical implications of Austin I, which is now approved by the Court en banc, are completely inconsistent with Hayden, for reasons we have given. The Court en banc is convened infrequently, though perhaps not infrequently enough, and we believe it is good judicial policy to use those infrequent occasions to bring consistency to our case law. If we were to leave Havden on the books, without indicating one way or the other whether it is still good law. we would almost guarantee that the Court en banc would have to meet again when the Hayden issue arose, unless, of course. the Supreme Court of Minnesota had, in the meantime, resclved the ques- tion, an event the likelihood of which we have no way of estimatiig. For these reasons, we believe it is a wise use of the Court's time and energy to say now that Hayden is inconsistent with the position we now take in Austin II, and, therefore, to state unequivocally that Hayden is abandoned. "In Berg v. Xerxes-Southdale Office Bldg. Co.. 290 N.W.24 612, 615 (Minn. 1980), the Court implied that tax benefits must be considered in determining damages under a Minnesota common law securities fraud A-8 der section 12(2) of the 1934 Act. Although the 1934 Act does not explicitly limit rescissionary damages to “ac- tual damages” sustained, we noted that: Under § 12(2), the defendant guilty of prospectus fraud shall be liable to plaintiff, who may sue either at law or in equity in any court of competent juris- diction, to recover the consideration paid for such security with interest thereon, Jess the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security. Id. at 181 (emphasis in original). Because we found that section 12(2) implicitly incor- porates the “actual damages” principle and that the words “income received” should be construed as including the tax benefits bargained for and received in the special case of a tax shelter investnient, we concluded that the plaintiffs’ damages must be reduced by the tax benefits they re- ceived. The plaintiffs now contend that we should reconsider both of the above findings of Austin I. First, they argue that the “actual damages” language in section 28(a) of the 1934 Act does not justify subtracting tax benefits from awards under section 12(2) of the 1933 Act h-- cause section 28 (a) applies only to the 1934 Act and the words “actual damages” do not appear anywhere within the 1933 Act. We reject this contention. Although the words “actual damages” do not appear in the 1933 Act, claim, at least where the case involves a limited partnership offering which includes the promise of artificial tax savizigs. 290 N.W.2d at 615- 16. See note 4, supra. See also Weise v. Red Owl Stores, Inc., 286 Minn. 199, 175 N.W.2d 184, 187 (1970) (the out-of-pocket rule also governs an award of damages for common law securities fraud). A-9 the courts have nonetheless applied the actual damages principle of section 28(a) to bar punitive damages’ un- der section 17(a) of the 1933 Act, Globus v. Law Re- search Serv., Inc., 418 F.2d 1276, 1278, 1283-86 (2d Cir.), cert. denied, 397 U.S. 913 (1970), and have con- strued the rescission and restitution remedy provided by section 12 (2) as substantially equivalent to the damages permitted under section 28 (a). Cf. Affiliated Ute Citizens v. United States, 406 U.S. 128, 155 (1972). The goal of rescission under section 12 (2) is to return the parties to the status quo ante, “and hence a plaintiff can recover no more than his or her ‘net eccnoinic loss,’ ” i.e., “actual damzuges.” Salcer, 744 F.2d at 940; Austin I, 675 F.2d at 181; Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 49 n.22 (2d Cir.), cert. denied, 439 U.S. 1039 (1978). We also reject plaintiffs’ contention that tax savings are neither “income” nor are they “received” within the mean- ing of section 12 (2). They cite United Housing Foundation, Inc. v: Forman, 421 U.S. 837 (1975) in support of their argument, but that case is inapposite. The plaintiffs in United Housing were tenants who were required to pur- chase refundable non-interest bearing shares in a non- profit housing cooperative in order to rent a low-cost apart- ment. After a rent increase was imposed to meet costs, plaintiffs brought fraud claims under the Securities Act of 1933 and the Securities Exchange Act of 1934, alleging that they were misled in the purchase of the shares by mis- representation in the cooperative’s information bulletin. “We reject the SEC’s argument that the actual damages principle is only intended to prohibit awards of punitive damages or duplicate state and federal recoveries based on the same conduct. See also Shapiro v. Mid- west Rubber Reclaiming Co., 626 F.2d 63, 70 (8th Cir. 1980), cert. denied, 49° U.S. 1079 (1981). A-10 The Court looked to “economic reality,” 421 U.S. at 848, in determining that the shares were not securities. It noted that the plaintiffs’ purchase of the shares was motivated by a desire to obtain housing, not to make a profit in the sense of a “return on investment.” The Court was not per- suaded that the plaintiffs expected a profit on their non- interest bearing refundable shares (which were akin to a “security deposit”) simply because they were able to re- duce their taxes by deducting that portion of their monthly rental charges which were applied to interest on the mort- gage. 421 U.S. at 855. The Court noted that “[e]ven if the tax deductions were considered profits, they would not be the type associated with a security investment since they do not result from the managerial efforts of others.” Id. 421 U.S. at 856 n.20. United Hous‘ng is not only distinguishable on its facts; if anything, its analysis tends to support our position in Austin I. Like the United Housing Court, the Austin / Court looked to “economic reality” in considering the tax aspects of a tax shelter investment.” Additionally, unlike the marginal tax benefits referred to in United Housing, the tax benefits in the case at hand were a primary moti- vation behind the investment and resulted from Lofts- gaarden’s efforts in structuring and operating the part- nership to take advantage of relatively complicated tax rules. See Salcer, 744 F.2d at 941 (“plaintiffs’ argument *See also Salcer, 744 F.2d at 941 (“To ignore the state’s tax benefits actually realized by the plaintiffs would be unrealistic.”); Bridgen v. Scott, 456 F. Supp. 1048, 1061 (S.D. Tex 1978) (“Requiring the jury or this Court to try this case without reference to the tax consequences of the transaction would be requiring the jury and this Cuurt to live in an artificial ‘never-never’ land. The plaintiffs’ position that the tax consequences of this transaction should be ignored is simply not real- istic and is tantamount to requesting this Court and the jury to try this case blindfolded.”). A-11 that defendants are not entitled to ‘credi.’ for the tax bene- fits because the latter were ‘provided’ by the govern- ment rather than by the defendants must be rejected * * * [Tjhat the tax benefits were paid by the government rather than by the defendants does not lessen the de- fendants’ role in securing them.”). In any event, Austin I did not hold that tax benefits re- ceived are a form of income in a strict accounting sense.” Rather, we held that section 12(2)’s requirement that “income received” be deducted in determining resc:ssion- ary damages simply reflected that ali economic benefits bargained for and received must be deducted from plain- tiffs’ damages because “the strictly compensatory nature of damages awarded in private securities fraud actions requires that such value he taken into account in de- termining whether and to what extent damages were in- flicted upon plaintiffs.” Austin I, 675 F.2d at 183. The plaintiffs claim that their tax benefits have not been “received” must also be rejected because they have stipulated that they have received permanent tax bene- fits from their investments in Associates. Similarly, we re- ject the contention of the Tax Division and the SEC that plaintiffs’ tax benefits “may” prove to be illusory be- cause they “may” experience recaptme upon sale or other disposition of the hotel. All of the plaintiffs in this case have already experienced all possible recapture when the hotel was foreclosed upon in 1978 We also reject, as with- out a factual basis, the Tax Division’s claim that “it is far from clear that all the proper income recognition and recapture provisions were taken into account.” Brief of *Loftsgaarden, in an apparent change jin strategy, now contends that the tax benefits are not income received but are instead a return of consider- ation. We address this claim infra. A-12 Tax Division at 11. All of the plaintiffs’ tax returns from the relevant tax years have already been audited and are now closed. We also find without merit the Tax Division’s claim that, under the “tax benefit rule,” the plaintiffs, upon receiving rescissionery damages, will have to amend their prior tax returns to eliminate all tax benefits previously received as a result of their investments in Associates. The “tax benefit rule” does not require elimination of tax benefits already received. See Hayden v. McDonald, 742 F.2d at 440. Rather, it provides that a taxpayer who claims a de- duction resulting in a tax benefit one year and who later obtains a recovery or repayment in a later year must in- clude the recovery or repayment as ordinary income in the year of recovery.” See Hillsboro National Bank v. Com- missioner, 460 U.S. 370, 103 S. Ct. 1134, 75 L.Ed.2d 130, 142-44 (1983); Salcer, 744 F.2d at 943: 1 Mertens, Law of Federal IncOme Taxation, § 7.34 at 7-115, § 7.37 at 7-130. We need not address the contention of the Tax Division and the SEC that the tax consequences of the rescissionary award will “wash out” any prior tax sav- ings, because we are not presented with such a situation in this case. The plaintiffs next contend, with support from the SEC, that the collateral source rule requires that Section 12(2) awards not be reduced by tax benefits. This rule “prohibits taking into consideration benefits received from third parties as the result of wholly separate and dis- tinct transactions, such as those received under insur- ™We need not decide whether a different situation might exist in a case involving actual rescission. See Salcer, 744 F.2d at 943; Burgess v. Premier Corp., 727 F.2d at 838. A-13 ance policies negotiated independently.” Salcer, 744 F.2d at 941. We agree with the Salcer Court that the tax bene- fits of plaintiffs’ investments are not a collateral source because “although paid by the government, [they] ema- nate directly from the tax shelter sought by the plaintiffs and provided by defendants, without which plaintiffs could not have realized any tax benefits. Benefits result- ing directly from a transaction under attack must be credited toward the damage award.” Jd. at 941-42. For similar reasons, we reject plaintiffs’ claim that we should ignore their tax benefits because otherwise the defendants will unjustly “retain” the consideration pre- viously paid by the plaintiffs. First of all, it does not ap- pear that the defendant has “retained” any of plaintiffs’ consideration; rather these monies were paid to the part- nership and were invested in the project. Moreover, the purpose of the private civil remedies provided by the feder- al and relevant Minnesota securities laws is not to pena'- ize defendants, but to compensate plaintiffs for any actual monetary loss. See id. at 941. This actual monetary loss cannot be determined without reference to tax benefits bargained for and received. We also reject the similar argument of amici that de- ducting tax benefits from damages will deprive the govern- ment of just tax revenues. The government is entitled only to those revenues which are authorized under the tax laws. These laws create incentives for real estat> projects to further public »volicy objectives. such as the creation of employment, enhancement of the real estate tax base and the local business climate. The Rochester Ramada project met all of the tax code criteria and thus generated the in- come tax benefits which the plaintiffs enjoyed. Th’s case is therefore very similar to Salcer, where the Court stated: A-14 Nor can‘ we agree with the notion that our ruling makes “the government the banker for fraudulent tax shelter activity,” Burgess v. Premier Corp., su- pra, 727 F.2d at 838. As Judge Broderick noted, there was no such activity in this case; the fraud, if any, pertained only to the investment aspects of the Greenspoint Project. The government got the residen- tial development that it hoped to encourage by offer- ing the tax benefits taken by the plaintiffs. Thus, it is “banking” precisely what it agreed to “bank.” There is no suggestion that the project did not meet federal requirements as a viable housing develop- ment entitling its owners to tax benefits. Id. at 941. There is no legal justification for awarding a party dam- ages to which he is not entitled merely to provide revenue for the government to tax. Next, we reject plaintiffs’ claim that the consideration of tax benefits in determining rescissionary damages in a tax shelter case creates unnecessary complexities. Our opinion in Austin I, 675 F.2d at 183, deals at length with this contention. We noted that “the complexity of evi- dence relating to plaintiffs’ tax savings is not a viable reason for precluding such evidence in light of Norfolk & Western R. Co. v. Liepelt, 444 U.S. 490, 100 S. Ct. 755, 62 L.Ed 2d 689 (1980).” Jd. We cannot agree that the retrial of the damages issue on remand reflects such complexity that Austin ] must now be reversed. Finally, plaintiffs and the SEC” contends that Austin I’s ‘**The SEC also argues that tax benefits should be considered in computing prejudgment interest, but not in computing damages. We agree with the Salcer Court, 744 F.2d at 942, that this argument “is so unrealistic and disproportionate as to border on the frivolous” and “must be rejected out of hand.” A-15 tax benefit offset rule discourages private enforcement of the antifraud provisions of the federal securities laws in an area in which the Commission itself is unable to de- vote substantial resources.” While it is unclear that this will be the result of the offset rule because most defrauded tax shelter investors will still be able to obtain at least some damages, we agree wi‘ the Sal/cer Court that it is for the legislature, not for th courts, to authorize the award of more than “actual dameges” in order to encourage the filing of private damage actions. Salcer, at 941. See also e.g., Alveska Pipeline Service Co. v. Wilderness Society, 421 U.S. 420 (1975) (shifting of attorneys’ fees by court to create incentives is permissible). In sum, we affirm the holding of Austin I “that in a private securities fraud action involving an investment structured and marketed as a tax shelter, where a re- scissory measure of damages is applied, evidence of any benefit derived by the plaintiff/investor via tax savings nfust be permitted.” Austin I, 675 F.2d at 183-84. Il. How should the plaintiffs’ rescissory damages he computed? On remand, the district court first determined the amount Of permanent tax benefits received by each of the plaintiffs as follows: Anderson, $29,615.00: Austin, $33,- 330.00; Neumann, $57,014.00; Randall, $36,404.00. The parties do not contest this finding: accordingly, we adopt these figures as the amovnt of tax benefits received by each plaintiff. The court then determined that each plaintiff was en- '*Most tax shelter securities are sold in private offerings exempt from the registration requirements of the 1933 Act. A-16 titled to prejudgment interest at the rate of eight percent simple interest under section 12(2) of tht 1933 Act. The interest rate has been approved by the panel opinion announced today along with the en banc opinion. The court then determined rescissory damages in ac- cordance with the specific language of section 12 (2); cordance with the specific language of section 12(2); less the amount of any income received thereon.” Under the district court’s amended determination, this computa- tion produced the following results: Plaintiff Austin Consideration paid June 6, 1973: $35,000 Simple interest at 8% to February 22, 1984: $31,277 Subtotal $64,610 Minus tax benefits: — $33,333 Total damages: $31,777 Plaintiff Neumann Consideration paid August 21, 1973: $35,000 Plus consideration paid October 19, 1973: $17.500 Simple interest at 8% to February 22, 1984: $43,885 Subtotal $96,385 Minus tax benefits: — $57,014 Total damages: “$39,371 “The court originally ordered compound interest but amended its judg- ment by ordering simple interest. A-17 Plaintiff Randall Consideration paid November 13, 1973: $35,000 Simple interest at 8% to Febru. y 22, 1984: $28,770 Plus consideration paid 1975: $2,512 Simple interest at 8% to February 22, 1984: $1,691 Subtotal $67,973 Minus tax benefits: — $36,404 Total damages $31,569 Plaintiff Anderson Consideration paid June 2, 1973: $35,000 Plus interest at 8% to Fehruary 22, 1984: $29,787 Subtotal $64,787 Minus tax benefits: — $29,615 Total damages: $35,172 / Although the parties and amici suggest several varia- tions from this damage computation formula, we believe they raise only three serious contentions. First, defendant Loftsgaarden argues that, under the section 12(2) dam- age computation formula, tax benefits are a return of “con- sideration paid” and thus must be deducted from con- sideration paid before adding on interest. As the district court noted, this course would drastically reduce the awards to Anderson and Austin and eliminate the awards to Neumann and Randall. We agree with the district court that this approach must be rejected. As we noted A-18 previously, Austin I did not indicate that tax benefits should be treated as a return of consideration. Instead, in holding that tax savings must be subtracted from damages we quoted section 12(2) and italicized the phrase, “less the amount of any income received thereon.” Austin I, 675 F.2d at 181. Similarly, in Hayden v. McDonald, 742 F.2d at 441, we characterized Austin I as “implicitly construing the ‘income’ language in a federal securities statute to in- clude tax considerations.” At least one commentator has also characterized Austin I as “classifying tax benefits received by the plaintiff as ‘income’ within the meaning of section 12(2) of the 1933 Act.” Note, Austin v. Lotfs- gaarden, etc., 16 Creighton L. Rev. 1140, 1151 (1983). Cf. S. Banoff, “To What Extent Will Benefits From Tax Shelters Be Permitted to Offset Rescission Damages?,” 57 J. Tax’n 154, 156 (1980). Additionally, whether or not tax benefits may be con- sidered “income” in a strict accounting sense, tax benefits are far more dissimilar to “consideration.” Moreover, al- though we find that section 12(2)’s ianguage “income received thereon” may properly be construed as including tax benefits bargained for and received, we do not agree that tax benefits can be considered a “return” of consider- ation. Finally, treating tax benefits as consideration returned would, even under Loftsgaarden’s calculations, mean that the plaintiffs would not be compensated for the‘r actual damages. For example, using Lcftsgaarden’s calculations of plaintiff Neumann’s net interest cost (as we explain further below), he would receive no Gamages even though A-19 he suffered net economic loss of at least $992.” Lofts- gaarden no doubt prefers the zero judgment figure to the $992 figure, in part because this would lend substantial support to his argument before the panel that Neumann is not entitled to the $29,000 in attorneys’ fees granted by the district court. In short, we cannot agree that the dis- trict court erred in refusing to treat the tax benefits as a return of consideration for purposes of determining the order of computation under the formula set forth in sec- tion 12 (2). Loftsgaarden next contends that the district court erred in awarding prejudgment interest on the total amount of consideration paid by each plainti’f from the date paid until February 22, 1984, rather than awarding interest only on the amount of money which each plaintiff was “out-of-pocket” during each year of the investment, We agree. The goal of prejudgment interest is to compensate plaintiffs for the loss of the use of their money. See Cant v. A. C. Becker & Co., 384 F.Supp. 814 (N.D. Ill. 1974); ‘“Loftsgaarden's calculations indicate that Neumann invested $52,500, lost $5,506 in opportunity cost on the use of his money at 8% simple interest and received $57,014 in tax benefits for a net economic loss of $992. By subtracting the $57,014 in tax savings from the $52,500 consideration paid, befere considering Neumann’s opportunity cost in that he did not receive the $57,014 back until several years after he invested the $52,500, Neumann receives zero in damages. Loftsgaarden cites Johns Hopkins University v. Hutton, 297 F. Supp. 1165, 1233 (D. Md. 1968), aff'd in part and rev'd in part on other grounds, 422 F.2d 1124 (4th Cir. 1970) as support, but that case is inapposite. In that case, the court treated “repayment of principal” as a return of consideration. A repayment of principal bears no similarity to tax benefits received. However, even if we were to change Austin I's rationale and treat tax benefits as a return of consideration, plaintiffs at minimum would be entitled to their net opportunity cost in damages. This could be done by reducing the amount of the tax benefits received to present value at the time of the investment using, for purposes of this opinion, the 8% discount rate. We prefer, however, to affirm the district court’s treatment of tax benefits as “income received.” A-20 Chris-Craft Industries, Inc. v. Piper Aircrafter Corp., 384 F.Supp. 507, 527 (S.D.N.Y. 1974), modified, 516 F.24 172 (2d Cir. 1975), rev’d on other grounds, 430 US. 1 (1977). Because plaintiffs were not deprived of the use of the entire amount of their investments over the ten year period, prejudgment interest is due only on the amount of money they were out-of-pocket at any given time. Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1307 (2d Cir. 1973) (prejudgment interest should be computed on the “net difference between value of assets given and value re- ceived”): Murphy v. Cady, 30 F. Supp. 466, 470 (D. Me. 1939). affd, 113 F.2d 988 ‘Ist Cir.), cert. denied, 311 U.S. 705 (1940) (reaching similar result by determining that plaintiff was entilitd under section 12(2) ”to recover the amount paid for [the security] with interest, less the amount received with interest”). Loftsgaarden has submitted what we find is a reason- ab'y accurate determination of the net interest costs in- curred by the plaintiffs taking into account the amount of money invested, and the tax benefits received by each vla‘nt‘ff during each year of their investment in Associates. These calculations, prepared by John M. Carlson, Certi- fied Public Accountant, are as follows:” **These calculations are based on the eight percent rate affirmed by the panel opit :on attached at the end of this opinion. These calculations take into account recapture and also net out plaintiffs’ interest costs by their interest gains on the amount of ordinary income above the amount of their investments retained in each year because of tax benefits con- ferred by their investments in Associates. These calculations also assume that each plaintiff did not receive the tax benefits umil April 15 of each year, when their tax returns were due. Although this does not take into account the benefits of potential reduced payments of estimated tax, we find that the calculations present a reasonably accurate and straight- forward method of determining net prejudgment interest costs. A-2i RANDALL Net Reduction Interest (increase in) Cost Tax Liability (earned) at Invested Current Carryback Balance Days 8% annum 11/13/73 35,000 35.000 153 1,174 4/15/74 4,499 30,501 365 2,440 4/15/75 21,268 9,233 365 739 4/15/76 10,481 (1,248) 365 (100) 4/15/77 10,272 (11,520) 365 (922) 4/15/78 7,297 (18,817) 365 (1,505) 4/15/79 (21,855) 3,038 365 243 4/14/80 4,442 (1,404) 1,339 (412) 12/15/83 35,000 36,404 (1,404) 3,682 1,657 ANDERSON 6/ 2/73 35,000 35,000 317 2,432 4/15/74 11,221 23,779 365 1,902 4/15/75 17,149 6,630 365 530 4/15/76 10,987 (4,357) 365 (349) 4/15/77 11,011 (15,368) 365 (1,229) 4/15/78 7,972 (25,340) 365 (1,867) 4/15/79 (35.974) (12,624) 365 1.011 4/15/80 7,249 5,386 1.339 1,580 12/15/85 35,000 29,615 5,385 3,846 4,010 NEUMANN 8/21/73 35.000 35,000 58 445 10/19/73 17,500 $2,000 178 2.048 4/15/74 19,560 32,940 368 2.635 4/15/75 9.858 23,092 365 1.847 7/15/75 3,677 19,415 91 387 4/15/76 14.431 4,984 274 299 4/15/77 4,888 96 365 & 7/15/77 77 19 91 4/15/78 9,000 (8,981) 274 (539) 4/15/79 (5,236) (3,745) 365 (299) 4/15/80 769 (4,514) 1,339 (1,325) 12/15/83 52.500 $3,260 3,754 (4.514) 3.765 5,506 AUSTIN 6/26/73 35,000 35,000 29% 2.248 4/15/74 13,066 21.934 365 1.785 4/15/75 19.259 2.675 365 214 4/15/74 10,863 (8,188) 365 (655) 4/18/77 3.324 (11.512) 365 (921) 4/15/78 7.646 (19.168) 34S (1,822) 4/15/79 (26,274) 7.116 368 569 4/15/80 5,449 1,667 1.339 489 12/15/83 35,000 33,333 —-1667«3.82? 2.166 A-22 SUMMARY Damages and Invested + Interest Cost — Tax Benefit = Interest Randall 35,000 1,657 36,404 253 Anderson 35,000 4,010 29,657 9,395 Neumann 52,500 5,506 57,014 992 Austin 35,000 2,166 33,333 3,833 Next, both plaintiffs and defendants contend that in order for the plaintiffs to be truly made whole, and to be returned to ‘he status quo ante, both the tax benefits re- ceived and the tax consequences of their recovery must be taken into account. Dicta in Hayden v. McDonald, 742 F.2d 423, 440 (8th Cir. 1984) supports this contention, and, as the parties are in agreement, we agree that the tax consequences of plaintiffs’ recovery must be considered. The parties disagree on how these tax consequences should be determined. We find Loftsgaarden’s method to be reasonably accurate and much simpler than plaintiffs’ formula and thus adopt Loftsgaarden’s method. This method, which was also used in the “Reardon Report,” which was cited in Hayden, takes into account the fact that, because each plaintiff will have to pay taxes on his award, the award must be calculated in an amount which each plaintiff would have to recover in order to “net out” their actual damage figure. We assume that each plaintiff is still in the fifty percent tax bracket and thus must re- ceive twice the above amount of damages and net interest cost. Thus, in accordance with the panel’s affirmance of the eight percent simple interest rate, each plaintiff is en- titled to a damage award as follows: Anderson ($9,395 x 2 = $18.790): Austin ($3.833 x 2 = $7,666): Neumann ($992 x 2 = $1,984): Randall ($253 x 2 = $506). In conclusion, the Court en banc affirms Austin I but A-23 vacates and modifies the district court’s award of dam- ages as Set forth above. There are three remaining issues which were initially heard by a panel of this Court. These issues are: (1) Whether the district court, on remand, erred in its inter- pretation of Austin ]; (2) whether attorney fees should have been awarded; and (3) whether prejudgment interest was properly calculated. For convenience, the panel’s opinion is incorporated herein: Before LAW, Chief Judge, and ROSS and McMILLIAN, Circuit Judges. Plaintiffs urge, on cross-appeal, that the district court should have allowed them to retry their case on the “out of pocket” damages theory. At the original trial the dis- trict court noted that “out of pocket” and rescissionary damages are essentially the same. However, plaintiffs hoped to avoid the Austin I mandate to consider tax bene- fits by changing to the “out of pocket” approach. On re- mand, the district court refused to allow the change in theories. We find no error. The plaintiffs tendered their shares to defendants shortly before the original trial and effectively elected the remedv of rescission. More import- antly, plaintiffs should not be allowed to introduce a new theory seme eight vears Jater. The case is now in its second appeal, after two trials. both of which focused on re- scissionary damages. We think it too late to change theor- ies and f'nd no abuse of discretion by either trial judge. Plaintiffs also argue that Austin I applies only to invest- ments “exoresslv structured and marketed as a tax shelter.” Austin I, 675 F.2d at 183. According to plaintiffs no fac- tual finding has ever been mede that thir narticular invest- A-24 ment was expressly structured and marketed as a tax shelter. The Austin I court defined a tax shelter as any investment which creates tax deductions through “arti- ficial losses.” Jd. The court en banc has endorsed that definition. Austin IJ, slip op. at 3. The evidence shows plaintiffs were able to reduce their tax liability significant- ly in the first few years of the investment through ac- celerated depreciation and other deductions. There are several contentions relating to attorney fees. Defendants contend Neumann and Randall failed to prove a cause of action which would support any award of fees and, even if they did, the amount awarded was excessive. Plaintiffs argue that the fees awarded were insufficient and, furthermore, that fees should have been awarded to Aus- tin and Anderson. First, the method of damage calculation determined by the court en banc makes it clear Neumann and Randall were damaged and proved a claim for relief. We find the award of fees to Neumann and Randall falls within the range of discretion of the district court. In weighing the arguments we find no abuse of discretion. Second, plaintiffs cannot recover fees under federal se- curities statute. The award to Newmann and Randa'l was based on Minn. Stat. § 80A.23 (2) (1984). This statute was not in effect before August 1, 1973. It is clear from the record that Anderson and Austin purchased their securities prior to that date. Under these circumstances the district court was correct in holding that Anderson and Austin were barred from recovery of attorney fees. The issue of the method of calculating interest has been resolved by the court en banc. Plaintiffs have argued that the rate, eight percent. was too law. Defendants, on the A-25 other hand, argue no interest can be awarded to Neumann and Randall because they suffered no actual damage and thus failed to prove a cause of action. As noted previously, the court en banc’s method of damage calculation shows Neumann and Randall did suffer damage and proved a cause of action. While the district court, on re- mand, was not bound by the original trial judge’s use of eight percent as the rate of interest, plaintiffs point to no evidence in the record which would suggest a higher rate. Although we believe the rate of interest should be based on a finding of fact from evidentiary proof, in the absence of such proof we feel the district court did not err in applying an eight percent rate as a traditional and fair rate of interest. The panel holds that the district court, on remand, cor- rectly interpreted Austin I and did not err or abuse its dis- cretion in the award of attorney fees and pre-judgment interest. In conclusion, we remand to the district court for entry of judgment as set forth in this opinion. HEANEY, Circuit Judge. concurring and dissenting. I concur in the majority’s opinion except insofar as it overrules Havden v. McDonald, 742 F.2d 423 (8th Cir. 1984). I continue to believe that the issue is a doubtful one and that in cases of doubt we should give great weight to a decision of a United States District Court interpreting a statute of the state in which it sits. Moreover, I think it is bad policy to reach an issue that was not presented to us by the parties and which we need not decide. LAY, Chief Judge, dissenting, joined by BRIGHT, Cir- cuit Judge. A-26 I incorporate my concurrence in Hayden v. McDonald, 742 F.2d 423, 441-42 (8th Cir. 1984), and the reasoning set forth therein for urging that tax benefits of plaintiffs in a rescissionary damage action have no relationship to their present claim, The Department of J ustice and the Se- curities and Exchange Commission have presented strong arguments against appellants’ theory in amicae briefs. The majority invokes the doctrine of law of the case. As Judge Learned Hand observed many years ago: “(Tit is now well settled that the ‘law of the case’ does not rigidly bind a court to its former decisions, but is only addressed to its good sense.” Higgins v. California Prune & Apricot Grower, Inc.. 3 F.2d 896, 898 (2d Cir. 1924). A court should never be constrained by the weight of a prior er- roneous decision. The purpose of an en banc hearing is to draw on the wisdom of the full court and rectify earlier errors. Reliance on precedent is a poor substitute for anal- ysis. The damages provisions of the federal statute, section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2), and the Minnesota Statute, Minn. Stat. § 80A.23 (1), are quite similar: § 12(2): * * * recover the consideration paid for such security with interest thereon, less the amount of any income received thereon * * *. § 80A.23(1): * * * recover the consideration paid for the security together with interest at the legal rate, costs, and reasonable attorney’s fees, less the amount of any income received on the securities. The key words are “less the amount of any income re- ceived * * *.” The majority concedes that the tax benefits A-27 received by plaintiffs are not really “income.” Nonethe- less, the court holds the benefits must be subtracted—not- withstanding the clear language of the statute—in order to give meaning to “actual income.” As Judge Arnold notes in his concurrence, the present holding as to Minnesota law cannot be rationally squared with Hayaen. Loftsgaarden relies heavily on Salcer v. Envicon Equities Corp., 744 F.2d 935 (2d Cir. 1984), cert. pending. The Salcer court was concerned the plaintiff might receive a windfall and, like the majority today, applied the tax bene- fits in favor of the defendant, transferring any possible windfall to the wrongdoer. The Ninth Circuit has held to the contrary, using the same reasoning I urge this court to adopt. Burgess v. Premier Corp., 727 F.2d 826, 837-38 (9th Cir. 1984). The Burgess court found that “to simply subtract the tax benefits from damages would place an unfair burden on taxpayers generally. * * * Such a result leaves the government bearing the cost of defendants’ fraud.” Id. at 838. See also Western Federal Corp. v. Erick- son, 739 F.2d 1439, 1444 (9th Cir. 1984). Application of tax benefits to lessen damages in a re- scissionary suit actually fails to comprehend the principle behind a “tax shelter.” The investor receives no money from the tax benefit; the investor simply is allowed tu de- duct a certain amount from his ordinary income or applv a credit toward tax owed for the particular tax year. The actual value of the benefit depends on the income hracket the investor is in, which in turn depends on other deduc- tions that may be available to the taxpayer that year. This fact alone demonstrates how speculative any benefit in tax savings may be. More significantly, the tax benefit is not a real or actual savings—it is usually only a deferral of A-28 tax. Ultimately, in a time of recapture when the investment is sold or otherwise disposed of, the taxpayer must return to the government tax benefits gained unless the investor suffers an actual loss. The court’s conversion of the tax de- ferral to realized income by subtracting it from a plaintiff's damages provides a windfall to the defendant—the fraudu- lent party. The holding in this case violates the old principle that “[i]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them.” Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir.), cert. denied, 382 U.S. 879 (1965), quoted in Myzel v. Fields, 386 F.2d 718, 747 (8th Cir. 1967), cert. denied, 390 U.S. 951 (1968). In mitigation, the majority believes Loftigaarden did not benefit from any of the consideration paid by plaintiffs. This is patently wrong. There was evidence at trial showing Loftsgaarden received over $100,000 profit from the in- vestment scheme. Under the majority”s approach, Lofts- gaarden gains both his own profit from the scheme and the advantage of plaintiffs’ speculative tax benefits. Such a result seriously undercuts the broad protective purpose of the Securities Act of 1933. See United States v. Naftalin, 441 U.S. 768. 774-777 (1979). The maiority adopts the macnanimous suggestion in Loftsgaarden’s brief that. in all fairness, plaintiffs’ ulti- mate damages should be doubled in order to offset the tax consequences of recovery—assuming plaintifis are in the fifty percent bracket. This serves to demonstrate how speculative and inaccurate the consideration of tax con- sequences can be in a suit involving rescissionary damages. A defendant should not have to pay damages based on the plaintiff's tax bracket in a given vear. This is not a dam- A-29 age caused by the defendant. Their theory is that to make plaintiffs whole and restore the status quo ante we must account for the tax treatment of plaintiffs’ recovery. How- ever, the relevant statutes clearly require the court to re- store the consideration paid to the defrauding party, with interest, less any income actually received from the invest- ment. And tax benefits concededly are not income re- ceived from the investment.’ Consideration of tax bene- fits involves the court in the problems of recapture and net gains or losses. In turn, the court finds it must consider each plaintiff's income and deductions in the year of re- covery to net out “actual damages” based on applicable tax rates. Rather than making up an artificial theory of damage by doubling the net gain, it is much simpler and more accurate to provide the plaintiff with restitution of his investment. The statutes provide a clear and simple formula. For example, Anderson invested $35,000 for a period of seven years. Loftsgaarden paid Anderson no in- terest or dividends and returned no principal. Anderson should recover $35,000 with interest for those seven years. Anderson will have to pay tax on the interest at ordinary income rates. In addition, he may be required to recapture past benefits. The tax transaction is between Anderson and the government and shou'd not affect Loftsgaarden’s liability. By this method a plaintiff recovers exactly what he lost: the principal, and interest he would have earned had that principal been invested in a legitimate security.’ If depreciation deductions were actually “income.” then every taxpayer who takes such a deduction would have to include it as gross income on the next year’s tax return, rather than applying it to the property's basis. *It is reasonable to assume that if plaintiffs had not invested in Lofts- gaarden’s fraudulent scheme, they would have invested in another legitimate project which would have returned similar tax henefits as well as principal and interest over the life of the investment. The maior- ity’s approach will not make plaintiffs truely whole because the tax benefits are subtracted from the return of principal and interest. A-30 This procedure is far more simple than requiring trial courts to undertake complicated and speculative eviden- tiary hearings on the mechanics of tax deferral plans and plaintiffs’ tax status in given years of investment. Today’s holding provides the wrongdoer a surety by which to avoid liability, allowing the fraudulent party to use the United States Treasury for security in any fraudu- lent transaction. To the extent a defendant can, by his wrongful act, create a tax loss for the innocent victim, the defendant will be allowed to escape liability, shifting the burden of the loss onto the government. I do not believe section 12(2) or section 80A.23 (1) was designed to ac- complish this result. Accordingly, I dissent. A true copy. Attest: CLERK, U. S. COURT OF APPEALS, EIGHTH CIR- CUIT. B-1 APPENDIX B UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA FOURTH DIVISION Dr. Roger E. Austin, Dr. Tom W. Anderson, Dr. Myrel A. Neumann and Dr. William C. Randall, Plaintiffs, vs. B. J. Loftsgaarden; Alotel Incorporated, a Minnesota cor- poration; M.S. Noah; John W. Burg; Lyman H. Coult; Robert R. Dunlap; and Property Development & Re- search Company, a Minnesota corporation, Defendants. Civil 4-76-82 AMENDED JUDGMENT Upon defendants’ motion for amended findings of fact and an amended judgment, and pursuant to Fed. R. Civ.P. 52 and 59, this court finds that the amount of pre- judgment interest awarded to plaintiffs in its order of Feb- ruary 22, 1984 be amended as follows to reflect simple interest at 8 per cent: Plaintiff Anderson Consideration paid June 2, 1973: $35,000 Plus interest at 8% to February 22, 1984: $64,787 Minus tax benefits: $29,615 Total damages: $35,172 B-2 Plaintiff Austin Consideration paid June 6, 1973: Plus interest at 8% to February 22, 1984: Minus tax benefits: Total damages: Plaintiff Neumann Consideration paid August 21, 1973: Plus consideration paid October 19, 1973: Plus interest at 8% to February 22, 1984. Minus tax benefits: Total damages: Plaintiff Randall Consideration paid November 13, 1973: Plus interest at 8% to February 22, 1984: Plus consideration paid 1975: Plus interest at 8% to February 22, 1984: Sub total: Minus tax benefits: Total damages: $35,000 $64,610 $33,333 $31,277 $35,000 $17,500 $96,385 $57,014 $39,371 $35,000 $63,770 $2,512 $4,203 $67,973 $36,404 $31,569 B-3 This order amends only the interest calculations of the February 22 order, and the rest of that order—including awards of attorneys’ fees and costs—stands intact. IT ISSO ORDERED. Dated: March 26, 1984. /s/ Miles W. Lord Chief Judge C-1 APPENDIX C (Title of Cause.) Civil 4-76-82 ORDER The plaintiffs in this case are four investors in a limited partnership who claim they were defrauded by defendants because of misrepresentations, half-truths and omissions in the Offering Memorandum used to attract them to a project to build and operate a Ramada Inn in Rochester, Minne- sota. In a 1980 trial before Judge Larson of this court, plaintiffs prevailed on various claims against defendant B. J. Loftsgaarden and three of his closely-held corpora- tions (hereinafter Loftsgaarden).’ A jury found Loftsgaard- en liable on claims under §10b(5) of the Securities Ex- change Act of 1934, Rule 10b-5, Minn. Stat. $S0A.01 ef seq., 80A.123, and common law fraud. The jury also found, in an advisory opinion adopted by Judge Larson, that Loftsgaarden had violated § 12(2) of the Securities Act of 1933. Loftsgaarden appealed. The Eighth Circuit Court of Ap- pea!s affirmed on the issue of liability, but remanded on the issue of damages. Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir. 1982). Specifically, the appeals court held that the amount of tax benefits received by plaintiffs as a re- sult of this investment must be deducted from the damages assessed against Loftsgaarden. /d. at 183-84. This court held a bench trial on the tax benefits question on December 2, 1983, after which time the parties sub- mitted additiona! briefs and affidavits. In addition to tax *Defendants Noah and Coult were found not liable. C-2 benefits, two other issues are now before this court: whether plaintiffs are entitled to prejudgment interest and whether plaintiffs are eligible for an award of attorneys’ fees against Loftsgaarden. AMOUNT OF TAX BENEFITS RECEIVED BY PLAIN- TIFFS. At the 1980 trial, Judge Larson refused to admit Lofts- gaarden’s evidence on the amount of tax write-offs these high-income plaintiffs enjoyed as a result of their Ramada investment losses, stating that the court was “not going to get into a lot of complicated tax testimony.” (T. 23) Judge Larson later characterized Loftsgaarden’s tax benefit ar- gument as “sophistic malarky.” Memorandum Order No. 4- 76-82 (D. Minn. Aug. 15, 1980). The appeals court saw otherwise: [W]e hold that the court committed reversible er- ror in refusing to allow proof of any economic bene- fits received by plaintiffs on account of the investment and in failing to instruct the jury that the damage award must be reduced by any value shown to have been received by plaintiffs. * KK In conclusion, we hé@id that in a private securities fraud action involving an investment structured and marketed as a tax shelter. where a rescissory measure of damages is applied. evidence of any benefit derived by the plaintiff/investor must be permitted. Austin, 675 F.2d at 181 and 183-84. At the December hearing before this court, three of the four plaintiffs accepted Loftsgaarden’s calculations on the C-3 amount of tax benefits they had received. Therefore, this court also adopts Loftsgaarden’s accounting on these three plaintiffs as follows: Anderson tax benefits: $29,615.00 Austin tax benefits: $33,333.00 Neumann tax benefit: $57,014.00 The fourth plaintiff, Randall, refused to concur with the computations of Loftsgaarden’s accountant. Indeed, plaintiff Randall continued to steadfastly maintain that he received no tax benefits at all in an argument that appears to be an attempt to reopen the issue conclusively decided by the Eighth Circuit. See Plaintiff Randall’s Trial Brief at 5-6. This court refuses to entertain such an argument at this juncture in the proceedings. Plaintiff Randall also asserted that he is entitled to re- scind his entire investment, thereby recovering his money and amending his IRS returns to disgorge any tax benefits. Under this approach, plaintiff Randall again declares that there are no tax benefits to charge against his damage award. However, this court finds Randall’s argument to be an untimely attempt to change the damage theory in this case. Both Judge Larson and the Eighth Circuit held that ages, not rescission itself. By attempting to change the theory of damages at this late date, plaintiff Randall is struggling to further protract and complicate a proceedings that has already dragged on far too long. That will not be tolerated by this court. Finally, plaintiff Randall submitted an accountant’s cal- culations under this court’s and the Eighth Circuit's theory of damages that is at odds with that of Loftsgaarden’s ac- C-4 countant. Randall claims his tax benefits totaled $26,- 085.59; Loftsgaarden claims the figure is $36,404. At the December trial, it was established by the testimony of the accountants that the major factor producing different numbers was that Randall’s accountant used an estimated tax rate of 54 percent, while Loftsgaarden’s used the ac- tual rates reflected in the returns. Obviously, this court finds that it is more appropriate to employ actual rates and therefore accepts Loftsgaarden’s accounting. Thus, it is the finding of this court that plaintiff Randall’s tax benefits from this investment amounted to $36,404. PREJUDGMENT INTEREST All plaintiffs assert that they are entitled to prejudgment interest on their damages awards under both § 12(2) of the Securities Act of 1933, 15 U.S.C. 1(2), and Minn. Stat. §80A.23, subd. 2. These statutes read as follows: Any person who ... offers or sells a security ... [in violation of this paragraph] ... shall be liable to the person purchasing such security from him, who may sue ... in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security ... 15 U.S.C. § 771(2). Any ptrson who violates Section 80A.01 ... shall be liable to any person damaged thereby ... to whom he sold such security .... Damages in an action pursuant to this subdivision shall include the actual damages sustained plus interest from the date of payment ..., costs and reasonable attorneys’ fees. C-5 Minn. Stat. 80A.23, subd. 2. In his post-trial memorandum, Judge Larson awarded prejudgment interest at the traditional rate of 8 percent to all plaintiffs under the federal statute cited above. Judge Larson found that plaintiffs Randall and Neumann also would be entitled to interest under the Minnesota Statute, but that plaintiffs Austin and Anderson were not cov- ered by the state law because they invested prior to the act’s implementation date. Since the Eighth Circuit did not disturb Judge Larson’s ruling that Loftsgaarden was liable to all plaintiffs under the federal statute, this court reiterates his order that all plaintiffs be awarded prejudg- ment interest at 8 percent under §12(2) of the Securities Act. CALCULATION OF DAMAGES Based on the foregoing discussion, the starting point for assessing damages will be the amount each plaintiff paid Loftsgaarden for his investment (in other words, the plain- tiffs consideration). To this, the court will add 8 percent interest from the date the consideration was paid to the date of this order. Finally, the amount of each plaintiff's tax benefits will be subtracted from the sum of his con- sideration and interest. This computation produces the following results: Anderson Consideration paid June 2, 1973: $35,000.00 Plus interest at 8% to February 22, 1984: $79,905.00 Minus tax benefits: $29,615.00 Total Damages: $50,290.00 C-6 Austin Consideration paid June 26, 1973: $35,000.00 Plus interest at 8% to February 22, 1984: $79.501.00 Minus tax benefits: $33,333.00 Total Damages: $46,168.00 Neumann Consideration paid August 21, 1973: $35,000.00 Plus consideration paid October 19, 1973: $17,500.00 Plus interest at 8% to February 22, 1984. $117,532.00 Minus tax benefits: $57,014.00 Total Damages: $60,518.00 Randall Consideration paid November 13, 1973: $35,000.00 Plus interest at 8% to February 22, 1984: $77,189.00 Plus consideration paid 1975: $2,512.00" This additional item of consideration stems from $7,500 in loans from Randall to Loftsgaarden. The full amount of these loans cannot be included in Randall’s consideration since the jury found, and Judge Larson and the Eighth Circuit concurred, that there was no liability for the loans because there was no reliance on misrepresentation at the time the loans were made. However, since Loftsgaarden included the $7,500 in Randall’s basis for his calculation of tax benefits (which inures to Loftsgaarden’s benefit), Randall should be able to claim that amount as income invested. According to Loftsgaarden’s accountant, inclusion of the $7,500 in Randall’s basis generated tax benefits of $2,512. (Randall’s accountant states that inclusion of the loans resulted in tax benefits of $2,025. Since no clear indication is given as to how this figure was arrived at, the court accepts the calculations of Loftsgaarden’s accountant. Surprisingly, Randall's calculations is more favorable to the defendant than the defendant’s own figure.) C-7 Plus interest at 8% to February 22, 1984: $4,650.00 Subtotal: $81,839.00 Minus tax benefits: $36,404.00 Total Damages: $45,435.00 Defendant Loftsgaarden disputes this straightforward method of computation. His approach would be to sub- tract the tax benefits from consideration paid before adding on interest, a course that drastically reduces or completely obliterates each plaintiffs award. However, the clear lan- guage of § 12(2) presents the order in which to consider these items. “consideration paid ... with interest thereon, less the amount of any income received ....” These words present an express directive to this court, and defendant cites no cases directly on point which hold to the contrary. ATTORNEYS’ FEES All plaintiffs have petitioned this court for attorneys’ fees under Minn. Stat. §80A.23, subd. 2, which specifically provides for such an award. (None of the federal statutes involved in this case authorizes attorneys’ fees.) As noted above, however, §80A.23 does not apply to all plaintiffs. Austin and Anderson purchased their inter- ests in the limited partnership before August 1, 1973, the Statute’s effective date. Judge Larson found that these dates of sale were the crucial determinants in deciding whether these two plaintiffs were covered by the new statute, since the facts which formed the basis of their claims was the fraud which took place when they pur- chased their interests. Austin and Anderson point to some broad language in the Eighth Circuit opinion to support their contention that the new statute embraces their claims. C-8 However, there is no indication anywhere in the opinion that the Eighth Circuit was doing anything more than af- firming Judge Larson’s findings on liability. Therefore, in accordance with Judge Larson’s opinion, this court finds that only plaintiffs Randall and Neumann can recover their attorneys’ fees. This ruling is somewhat mitigated by the fact that Austin and Anderson shared attorneys with Neumann. As Judge Larson found, most of the work performed by these plaintiffs’ attorneys would have been done even if Neumann had been the only client. Judge Larson granted attorneys’ fees of $10,000 to Randall and $15,000 to Neumann. In addition, Judge Larson awarded costs of $1,308.62 to Randall and $2,- 210.53 to Neumann, Austin and Anderson. These amounts have never been paid. This court now orders that they be paid pursuant to this memorandum. The fees considered by Judge Larson were those in- curred through the trial of this action. Attorneys’ fees cover- ing the appellate proceedings have already been paid. Remaining for consideration, then, is the post-appellate phase of this suit, that is, time spent on the issues of dam- ages and prejudgment interest. For this segment, plaintiffs Neumann, Austin and Ander- son request attorneys’ fees of $16,174.17 based upon hourly rates of $60 to $135. Plaintiffs’ attorneys faced a complex case and a zealous defense. As already noted, although only Neumann is entitled to fees, much of the work was done for these three plaintiffs as a group by their common attorneys. This court finds that a reasonable fee for Neumann would be $14,000 and also awards these three plaintiffs costs of $3,111.30. See Zoll v. Eastern C-9 Allamakee Community School District, 588 F.2d 246 (8th Cir. 1978); State v. Paulson, 188 N.W.2d 424 (Minn. 1971). Plaintiff Randall requests attorneys’ fees of $14,825 based upon rates of $50 to $100. However, this request is based on a recalculation by Randall’s attorney who went back through his time records to update his hourly fee to the rate he currently charges, not the rate he charged at the time the work was performed. This court finds that a reasonable fee would be $10,000 plus costs of $1,647.87. SUMMARY Based upon the foregoing discussion, IT IS HEREBY ORDERED THAT: 1. Damages awards be granted in the following amounts: Anderson: $50,290.00 Austin: $46,168.00 Neumann: $60,518.00 Randall. $45,435.00 2. Attorneys’ fees be granted as follows; Neumann: $29,000.00 Randall: $20,000.00 3. Costs be granted as follows: Anderson, Austin and Neumann: $5,321.83 Randall: $2,955.49 IT IS SO ORDERED. Dated: February 22, 1984. /s/ Miles W. Lord Chief Judge D-1 APPENDIX D No. 80-1771 No. 80-1874 Dr. Roger E. Austin, Dr. Thomas W. Anderson, Dr. Myrel A. Neumann and Dr. William C. Randall, Plaintiffs, Appellees and Cross Appellants, Vv. B. J. Loftsgaarden; Alotel Incorporated, a Minnesota Corporation; M. S. Noah; Lyman H. Coult; Property Development & Research Company, a Minnesota Cor- poration; and 2361 Building Corporation, a Minnesota Corporation, Defendants, Appellants and Cross Appellees. Appeal from the United States District Court for the Dis- trict of Minnesota Submitted: June 17, 1981 Filed: April 7, 1982 Before McMILLIAN and ARNOLD, Circuit Judges, and HANSON, Senior District Judge HANSON, Senior District Judge. Plaintiffs-appellees are four of twenty-two limited part- ners who invested in a development to build and operate a Ramada Inn Motel in Rochester, Minnesota. In the district court they prevailed on various claims that they were de- frauded by defendants-appellants B. J. Loftsgaarden and D-2 three of his closely-held corporations because of misrep- resentations, half-truths, and omissions that were found to exist in the Offering Memorandum used to attract plain tiffs to the project.’ A jury found Loftsgaarden and the cor- porate defendants (hereinafter Loftsgaarden) liable upon claims under § 10 (b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j (b); Rule 10b-5, 17 C.F.R. § 240.10b-5; the antifraud provisions of the Minnesota Securities Act, Minn. Stat. §§ 80A.01, 80A.23; and com- mon law fraud.” The jury also rendered an advisory ver- ‘Defendants Noah and Coult, officers and directors of the corporate general partner, Alotel, Inc., were found not liable. 2810(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b), provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any national securities exchange— (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Rule 10b-5 implementing §10(b), 17 C.F.R. §240.10b-5, provides: Employment of manipulative and deceptive devices. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or ' (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Minn. Stat. §80A.01 provides: It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly: (a) to employ any device, scheme or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. D-3 dict—in which the district court concurred—that defend- oants were liable for violating § 12(2) of the Securities Act oof 1933. 15 U.S.C. § 771(2).’ The district court applied a rescissory remedy, which resulted in an award to plain- tiffs in the amount of the consideration that each had paid for his limited partnership unit or units, prejudgment in- terest from the date of purchase, and attorneys’ fees for plaintiffs Randall and Neumann for a total judgment of $273,720. Defendants raise a number of issues on ap- peal mainly relating to the sufficiency of evidence on the essential elements of these claims and the measure of dam- ages. Plaintiffs cross-appeal from the district court’s de- nial of certain portions of their requested attorneys’ fees. We affirm as to the finding of liability, but remand for further consideration on the issue of damages. I. B. J .Loftsgaarden is an attorney and the president and sole shareholder of corporate defendants Alotel, Inc., Property Development and Research Company (PDRC), o’$ 12(2) of the Securities Act of 1933, 15 U.S.C. § 77/(2) provides in pertinent part: Any person who — (2) offers or sells a security .. ., by the use of any means or instruments of transportation or communication in interstate com- merce or of the mails, by means of a prospectus or oral communica- tion, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security. D-4 and 2361 Building Corporation. Through these corpora- tions, Loftsgaarden intended to build and operate a Ra- mada Inn in Rochester, Minnesota.“ To help finance the $3.5 million project, he organized a limited partnership, Alotel Associates, through which he expected to raise $1 million by selling 40 limited partnership units to not more than 20 investors for $25,000 per unit. The remainder of the money was to be obtained through a $2.31 million mortgage loan from Larwin Realty and Mortgage Trust’ and a $240,000 furniture and fixtures loan from the First National Bank of Rochester. Loftsgaarden and Alotel, Inc., were tc serve as the project’s general partners. In December 1971, Loftsgaarden prepared an offering memorandum through which he hoped to interest investors in the limited partnership units. The memorandum in- dicated that the partnership would “operate as a ‘tax shelter’ ”, leading to “significantly greater returns for per- sons in relatively high income tax brackets.” Accordingly, the memorandum outlined “Investor Suitability Standards” requiring that each investor have a net worth in excess of $200,000 excluding home and automobiles or that some portion of the investor’s income was subject to federal and state income taxes at a rate of fifty percent or more. Paul Crawford, an investment advisor whom Loftsgaard- en knew was not licensed to act as such. agreed to help Loftsgaarden find suitable high income investors. The attraction of such an investment to high tax bracket *PDRC was the entity through which the real estate would be obtained and 2361 was to serve as the project’s general contractor. *The $2.31 million loan would initially be made by First National Bank of St. Paul, which would supply interim construction financing to the partnership. Once motel construction was completed, Larwin would buy the loan from the St. Paul bank pursuant to a “take-out” commit- ment and put in its place a first mortgage. D-5 individuals lies in the tax treatment of the partnership’s income and losses. Because the partnership is not taxed as an entity, it serves as a conduit to the partners for all its taxable income and losses. I.R.C. §§ 701, 702. Each partner is permitted to take his or her share of the partner- ship’s deductible losses “to the extent of the adjusted basis of such partner’s interest in the partnership....” I.R.C. § 704 (d). But in a real estate investment such as the one contemplated by Loftsgaarden, the limited vyartner’s basis is not restricted to the amount of his actual invest- ment (the amount “at risk”); rather, it may be increased by the partner’s proportional share of any nonrecourse loans made by the partnership. See I.R.C. § 465 (c) (3) (D). Against such an increased basis, a limited part- ner is able to receive from the partnership deductible losses far in excess of the amount he or she has at risk in the investment. By using accelerated methods of depre- ciation, prepaying interest on loans, renting instead of purchasing land, and other methods, the partnership is able artific’ally to generate large amounts of deductible losses and expenses in the early vears of the venture which are passed on to the partners to use in offsetting other in- come on their individual tax returns.* The result is that a *One commentator offers the following example: A hypothetical real estate partnership might show a $50. 90 loss in one year. Assume that this loss was obtained by taking the differ- ence between $60,000 of deductible depreciation and $10,000 of gross rents in excess of operating expenses and interest. If mortgage amortization. a nondeductible expense, were $2.000. then the partner- ship would have a positive cash flow of $8,000. If under the partner- ship agreement, one limited partner were entitled to 50% of the partnership losses and 37.5% of the cash flow, that partner would receive $3,000 in cash, but his tax return would reflect only his share of the partnership's net loss, or $25,000. Note, Real Eestate Limited Partnerships and Allocational Efficiency: The Incentive to Sue for Securities Fraud. 63 Va.L.Rev. 669, 673 n.22 (1977). See also T. Dahlk, Real Estate Partnerships an? the Securities Laws: A Primer, 12 Creighton L.Rev. 781. 783 (1979): R. Hrusoff, Securities Aspects of Real Estate Partnerships, 11 Ca.W.L.Rev. 425, 458 (1975). D-6 limited partner can often recoup his money in the year of his investment through tax savings. Generally the tax shelter serves only to defer taxation until the investment is liquidated and each partner receives his or her propor- tional share of the proceeds of the sale. Any gain realized will be taxed partly at capital gains rates (assuming the greater than one year holding period has been satisfied) and partly at ordinary income rates (to the extent that the accelerated depreciation taken exceeds the amount that would have been taken if a straight-line method were used). I.R.C. §§ 1231, 1250. Under the terms of Loftsgaarden’s offering memoran- dum, Alotel Associates planned to employ some of the above-described methods to provide immediate tax savings to the limited partners. The $2.31 million loan from Lar- win would be a nonrecourse loan, thus serving to increase each limited partner’s investment basis. In addition, rapid depreciation methods would be used to generate large de- ductible losses in the early years of the investment. Despite these features, only one person was willing to make the $50,000 minimum investment. This forced Loftsgaarden to terminate the offering and revise ‘ne project to further enhance the tax benefits and reduce the minimum pr'ce per investor. Instead of purchasing land as originally con- templated, the partnership would rent land thereby in- curring another tax deductible expense.’ Since capital ’The land rental would be effected through a sale-leaseback arrangement whereby the partnership would acquire the land. sell it to a third party, and then lease it back from the third party purchaser. In reality, the transaction worked as follows: Part of the land was purchased by the partnership and then sold to Loftsgaarden’s corporation, PDRC. In turn PDRC purchased the remainder of the land outright. then sold the entire parcel to a third party, which leased the land back to PDRC. Then PDRC subleased the land back to the partnership. D-7 was no longer required to purchase land, the amount of money Loftsgaarden needed to raise through the sale of limited partnership units was reduced from $1 million to $700,000. This also reduced the minimum investment per limited partner from $50,000 to $35,000 and the total number of units from 40 to 20. In May 1973, Loftsgaarden revised the offering mem- orandum to reflect these changes. An accounting forecast included in the memorandum stated that the partnership would suffer losses resulting in income tax savings during its first three years; thereafter the business would begin to show a profit. Again Crawford aided Loftsgaarden in find- ing suitable high income investors. This time the offering proved successful. In the surmmer and fall of 1973, plain- tiffs—Drs. Roger Austin. Thomas Anderson, Mvrel Neumann, and William Randall—were among those who purchased units." The jury found that plaintiffs bought their units in reliance on the representations made in Loftsgaarden’s offering memorandum and upon the advice of either Crawford’ or their own financial advisors who ‘in turn relied on the memorandum. Among other matters, the offerine memorandum repre- sented that Loftsgaarden could obtain interim construction financing for the motel at an interest rate of nine and one- half percent: that the construction loan interest would amount to $130,000; that the land lease would run for forty years with renewal! and purchase options: that con- struction of the mote! would heg'n in May 1973 and be completed seven months later in December 1973: that the ‘Plaintiffs each purchased one $35,000 unit excent for Dr. Neumann who bought one and a half units for a total investment of $52,000. *Loftsgaarden admits that Crawford made no representations “other than those in the Offering Memorandum.” Brief for appellants at 16. D-8 developer and the construction company (i.e., Loftsgaarden and 2361) would receive $103,000 for “overhead and profit”; that the $240,000 furniture and fixtures loan from the Rochester bank would be at an interest rate of eight percent; and that Alotel Associates had procured a firm commitment for long term financing” from Larwin. Find- ings of Fact, Conclusions of Law, and Order for J udgment, Designated Record (D.R.) 445-59." These representations were found to be false. In fact, Loftsgaarden had not obtained either the interim construc- tion loan or the furniture and fixtures loan at the stated fixed interest rates, but rather at interest rates that floated ing rate. The land lease was for fifteen years with a fif- teen-year renewal option instead of forty years with re- newal and purchase options. Loftsgaarden knowingly un- derestimated the construction time by five months, thus the memorandum’s estimate that construction loan interest would amount to $130,000 was too low because it was based on a lower interest rate and a shorter construction time than actually expected. It was also not true that he had a firm commitment from Larwin for tthe partnership's permanent financing. The loan was contingent upon Larwin receiving adequate assurance that it was not usur- ious under Minnesota law.” Overall, the budgets and fore- **At a nine and one-half percent interest rate. “These findings and conclusions relate to the district court’s ruling on plaintiffs’ §12(2) claim and are consistent with the special verdict returned by the jury upon the §10(b), Rule 10b-5, Ch. 80A, and com- mon law fraud claims. D.R. 266-74. 12At the time the offering memorandum was circulated, Minnesota law limited interest rates on loans to noncorporations to eight percent. Larwin finally agreed to make the loan through a corporate nominee, PDRC, which borrowed the money at nine and one-half percent from Larwin and then advanced it to the partnership at the legal rate of eight percent. PDRC recovered its loss on the transaction by adjusting the land rent it charged to the partnership. Supra note 7. SUE D-9 casts in the offering memorandum were found to be based on unreasonable and misleading assumptions. Additionally, it was found that Loftsgaarden had omitted any explanation of the role his closely-held cor- poration would assume in the development. He did not reveal that PDRC expected to earn a profit on the various land transactions required to set up the sale-leaseback arrangement, that PDRC would receive a commitment fee for having obtained financing for the partnership, and that he owned a thirty percent interest in ARC-TEC— the architectural firm with which he contracted to des'gn the motel. Overall, it was clear that Loftsgaarden and the corporate defendants expected compensation considerably greater than the $103,000 stated in the offering memor- andum, their expectation being more on the order of $240,000. Alotel Associates encountered financial difficulties from the project’s inception. Construction costs exceeded those budgeted, largely be-*"> of ever-increasing interests rates.” When the motel finally opened in June 1974, oper- ating expenses exceeded those that were forecast and oc- cupancy rates fell short of expected levels. Exacerbating matters was Larwin’s refusal to “take out” (supra note 5) the interim construction loan upon completion of con- struction because it had not received adequate assurances that its loan to the partnership was legal under the Min- nesota usury law. Loftsgaarden was not able to placate Larwin and get the permanent financing in place until De- ‘*The district court’s findings indicate that the prime rate charged by the construction lender, First National Bank of St. Paul, rose from six percent in February 1973 to ten percent in February 1974. As has already been noted, the partnership was obliged to pay interest on this $2.31 million loan at a floating rate of four percent over the bank’s prime lending rate. D-10 cember 1974, resulting in an additional six months of high interest charges to the partnership. Loftsgaarden sold five additional units in Associates in October 1974 to raise $175,000 for repayment of debts and additional operating capital. In February 1975 Loftsgaarden asked the limited partners to make $125,000 in loans to keep Associates afloat. The limited partners hired an accountant, John Essene, to investigate the partnership’s financial condition. Essene reported in March that in fact $200,000 would probably be required to continue business operations. Plaintiffs and other limited partners did make loans to Associates at this point,” but they also hired an attorney to make further investigation of the partnership's financial affairs. The district court found that by August or Septem- ber 1975, plaintiffs knew or should have known of de- fendants’ fraud. In September, Loftsgaarden agreed to re- sign as general partner: thereafter pla‘ntiffs made addi- tional loans to Associates, but the business continued to flounder. Associates ultimately defaulted on its loans and land rent payments and foreclosure by creditors ensued. Plaintiffs filed their complaint on February 24, 1976. On June 25, 1980, after a seven-day trial, the jury found that Loftsgaarden knowingly had made material misrepre- sentations and omissions in the offering memorandum upon which plaintiffs relied and which caused plaintiffs’ damages. thus satisfying all the elements of the § 10 (b). Rule 10b-5, Ch. 80A. and common law fraud cla‘ms.” The district court also accepted the jury’s advisory ver- dict that Loftsgaarden was liable under § 12(2) because “The jury found that neither these nor any subsequent advances were induced by any misrepresentations by Loftsgaarden and plaintiffs were not entitled to recover any of the amounts advanced. 1The parties agree that the elements of these various claims are identical. D-11 he knowingly made material misrepresentations or omis- sions of which plaintiffs were unaware, and because there was some causal connection between Loftsgaarden’s wrongful conduct and plaintiffs’ purchases. See Alton Box Board Co. v. Goldman, Sachs & Co., 560 F.2d 916 (8th Cir. 1977). Il. Loftsgaarden complains that there is insufficient evi- dence of materiality, reliance or causation to sustain the jury’s verdict upon piaintiffs’ § 10 (b), Rule 10b-5, Ch. 80A. and common law fraud claims. It is also claimed that the district court’s findings of materiality and causa- tion in support of its conclusion that liability existed under §12 (2) are clearly erroneous. A. A statement or omitted fact is considered material if it is substantially likely that a reasonable investor would consider the matter important in making an investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).” Whether or not the misrepresented Or omitted fact is important turns On whether a reason- able investor would regard it as significantly altering the total mix of information made available. /d. Leaving aside the relatively few misrepresented and omitted matters which Loftsgaarden claims are unsup- ported by the evidence, we focus upon what we regard as **Reliance is not an element of an action under §12(2). Alton Box Board Co. v. Goldman, Sachs & Co $60 F.2d 916, 924 (8th Cir. 1977). “TSC Industries arose under §:4(a) of the Securities Exchange Act of 1934, but the test for materiality is the same under all of the securities — See Alton Box Board Co. v. Goldman, Sachs & Co., supra at 919-20. D-12 his primary challenge to the materiality finding Lofts- gaarden in effect admits that the following facts were either misrepresented in OF omitted from the offering memc-andum, but he argues that these facts should be deemed immaterial: Loftsgaarden held a 30% interest in ARC-TEC; the partnership was to pay a $25,000 broker- age fee in conjunction with the sale of land; the project was a revision of a prior failed offering by Loftsgaarden; Crawford was an unlicensed seller; the interest rate On the interim construction loan floated at four percent over the prime rate; the land lease was for a shorter term than represented; the furniture and fixtures loan was to be se- cured by a chattel mortgage; the permanent financing from Larwin was contingent upon assurances that it would not be usurious; the corporate general partner was an un- funded shell corporation; Loftsgaarden stood to gain over twice the profits stated; and the offering, while not required to be registered with the state, would have failed to qual- ify had registration been sought. The jury applied the proper standard of materiality and found that full disclosure of the above matters would be regarded as important by a reasonable investor. The Su- preme Court has recognized that the trier of fact is uniquely competent to make the materiality determina- tion, requiring as it does “delicate assessments of infer- ences a [reasonable investor] would draw from a given set of facts... .” Id. at 450. We cannot fault the jury’s as- sessments in this case and we uphold the materiality f nd- ing. B. Ordinarily, reliance requires proof that the misrepresen- tations actually induced plaintiffs to act differently than D-13 they otherwise would have in making their investment de- cisions. St. Louis U. Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 562 F.2d 1040, 1048 (8th Cir. 1977), cert. denied, 435 U.S. 925 (1978). But in cases in- volving primarily a failure to disclose, reliance will be pre- sumed upon a showing that the withheld information was material. Affiliated Ute Citizens v. United States, 406 U:S. 128, 153-54 (1972). Because there were both misrepre- sentations and omissions in the offering memorandum, Loftsgaarden requested and the jury given a dual in- struction which stated that plaintiffs had the burden of proving they relied on the misrepresentations, but that as to the omissions, reliance was presumed upon a showing of the materiality of the omitted facts.” Loftsgaarden contends that there is no evidence to sup- port a finding of reliance in this.case. On the contrary, the record indicates that the only information received by plaintiffs came from the offering memorandum. Austin testified that he went over the offering memorandum with Crawford, devoting particular attention to the forecast **The court instructed: In this case, the njaintiffs allege that the offering memorandum which was supplied to thein by defendant Loftsgaarden contained representa- tions which were false and misleading. They also alleged that defendant Loftsgaarden made oral representations to them at the time that they purchased their units in Alotel Associates, and at the time that further contributions to the partnership were solicited, which were false and misleading. As stated above, before the plaintiffs can prevail on these claims, they must first prove that such false and misleading representa- tions were made. In addition, the plaintiffs must prove that they in fact relied upon these representations. The plaintiffs also claim that the offering memorandum was false and misleading in that it failed to disclose material facts. Where the claims asserted under Section 10(b) or Rule 10b-5 relate to nondisclosure as opposed to misrepresentations, then, if the nondisclosed facts are mate- rial, there is a presumption that the plaintiffs relied upon that nondis- closure. In that case, the plaintiffs need not prove that they would have acted differently had the facts been disclosed. T. 795-96. D-14 of cash flow, and that the memorandum “was the principal reason, I would say, that I invested in it.” T. 557. Like- wise, Anderson testified that he read and made notes on the offering memorandum and that it was “the extent of the information I did have at the time I invested.” (T. 591. Randall relied on the advice of his accountant, John Essene, who testified, “All I had to work with was the of- fering circular. . . . It was really the only source of infor- mation that was available.” T. 494. Neumann relied on the advice of his accountant and business partner, Delroy Blaske. who reviewed and analyzed the offer‘ng memor- andum, particularly focusing on the forecasts, Blaske tes- tified the offering memorandum was “all we had to go on.” T. 568.” Loftsgaarden argues that there is no evidence plaintiffs actually were misled by eny of the specific aspects cf the offering memorandum that were found to have been mis- represented. But misrepresentations so permeated this document that the trial court found the‘r cumulative effect was to render the forecasts and projections unreasonable and misleading.” Accordingly, .eliance could be found 1°] oftsgaarden argues that no “derivative reliance” theory (i.e., plaintiffs relied on experts who in turn relied on the offering memorandum) may be advanced because such a theory was neither pled nor raised at trial. See Kiernan v. Homeland, Inc., 611 F.2d 785, 789-90 (9th Cir. 1980). We reject this argument. The so-called derivative reliance theory was dis- allowed in Keirnan because plaintiff raised it for the first time on appeal, effectively denying defendants any opportunity for rebuttal. In addition, plaintiff failed to introduce any evidence that the third parties upon whom he purportedly relied did themselves rely on any misrepresenta- tions. In the instant case, the third parties upon whom Neuman and Randall relied. Blaske and Essene, gave direct testimony and were sub- iect to cross-examination on the reliance issue. 2C#. Nye v. Blyth Eastman Dillon & Co.. $88 F.2d 1189. 1197 n.14 (8th Cir. 1978) (“The appellants attempt to separate out each misrepresenta- tion and show that each was insufficient to mislead the appellees. Such a position has little merit. Considered in the acgrevate. we agree with the trial court that the misrepresentations did induce reliance on the part of the appellees.” ). ee ~ PES D-15 from evidence that plaintiffs’ only source of informa- tion in making their investment decisions was the offering memorandum. It is next argued that the trial court erred in failing to instruct that the presumption of reliance upon material omitted facts is rebuttable. This point would be more troublesome were we confronted with a situation where the only reliance instruction given was a presumption instruc- tion. In such a case, we think it is necessary that defend- ant be allowed to rebut the presumption of reliance and that the jury be instructed on the rebuttable nature of this presumption. See Sharp v. Coopers & Lybrand, 649 F.2d 175, 189 (3d Cir. 1981); cert. denied, 50 U.S.L.W. 3668 (U.S. February 23, 1982) (No. 81-433); Shores v. Sklar, 647 F.2d 462, 476 (Sth Cir. 1981), petition for cert. filed, 50 U.S.L.W. 3377 (U.S. November 2, 1981) (No. 81-839); St. Louis U. Trust Co., supra at 1049, But we hold that Loftsgaarden suffered no prejudice in the instant case by the omission of the rebuttability instruction because, in- dependent of any presumption of reliance that may have been made, the jury found that plaintiffs affirmatively proved reliance.” “It is not apparent from the findings on the §10(b) and Rule 10b-5 claims whether the jury found affirmative proof of reliance upon mis- representations or presumed reliance based on material omissions or both. The issue, however, is clarified by the jury’s alternative finding of liability based upon common law fraud. In this regard, the trial court instructed that plaintiffs had the burden of affirmatively proving reliance in order to recover. Overall, the instructions and special verdict questions fully and cor- rectly presented the reliance issue to the jury. We are, however, inclined to agree with the Third Circuit that a dual instruciton on reliance is not the appropriate solution when confronted with a securities fraud case where both misrepresentations and omissions are present. We endorse that circuit’s conclusion that “the proper approach to the problem of reliance is to analyze the plaintiff's allegations, in light of the likely proof at trial, and determine the most reasonable placement of the bur- den of proof of reliance.” Sharp v. Coopers & Lybrand, 649 F.2d 175, 188 (3d Cir. 1981). Such an approach is consistent with this circuit's view that the presumption of reliance is limited to cases involving primarily omissions. Vervaecke v. Chiles, Heider & Co., 578 F.2d 713, 716-17 (8th Cir. 1978). D-16 C. Causation requires a showing of “some causal nexus be- tween the defendant’s wrongful conduct and [plaintiff's] loss.” St. Louis U. Trust Co., supra at 1048. Loftsgaarden contends that there is no connection between the mis- representations and omissions in the offering memorandum and the eventual foreclosure of the motel.” The the- ory advanced appears to be something akin to a contribu- tory negligence defense, in which Loftsgaarden claims that it was acts by plaintiffs themselves that caused fore- closure of the motel. Our answer to this is simply that any direct contribution made by plaintiffs to the demise of the project after they ousted Loftsgaarden as general partner does not relieve him from liability for his own intentional tortious acts. The evidence shows that the numerous mis- representations and omissions—particularly those relating to financing—unquestionably caused the project to be launched on unsoutid financial footing. This in itself is sufficient evidence to establish causation. Loftsgaarden is not to be excused from liability because of plaintiffs’ in- ability to extract themselves from a predicament for which he was squarely to blame. D. Thus, we uphold the finding of liability on § 10 (b), Rule 10b-5, Ch. 80A. and common law fraud. On the 22He further contends that the trial court erred in precluding introduction of evidence surrounding the progress of the project and the decisions which led to its ultimate foreclosure after Loftsgaarden resigned as general partner. We have examined the record and we hold that the evi- dentiary matters raised by Loftsgaarden had no bearing on the causation issue and were properly excluded for the reasons stated by the lower court at trial. a | > ileal a D-17 basis of the foregoing discussion, we also hold that no clear error exists in the lower court’s findings of materiality and causation in support of its conclusion that liability exists under § 12 (2). As previously stated, the materiality stan- dard is the same under all! the securities statutes. Alton Box Board Co. v. Goldman, Sachs & Co., supra at 919-20. Causation under § 12 (2) is shown by demonstrating “some causal relationship” between the misrepresentations or omissions and plaintiffs’ purchases. Jd. at 924. We are no- where left with the “definite and firm conviction that a mistake has been committed” regarding either of these findings. United States v. United States Gypsum Co., 333 US. 364, 395 (1948). In addition, we reject Loftsgaarden’s argument that re- scission under § 12(2) was not an available remedy to plaintiffs because no timely demand for rescission nor timely tender of the limited partnership units was made. We do not read § 12(2) as requiring any demand for re- scission. All that is required is that the claim be made within the applicable statute of limitations, § 13 of the 1933 Act, 15 U.S.C. § 77m Section 13 requires that ac- tion brought under § 12(2) must be brought within one year after the untrue statement or the omission is discovered or should have been discovered and that in no event may an action be brought more than three years after the sale. But even an untimely claim raised under § 12(2) may sur- vive if it is raised in accordance with the relation back rule. Rule 15 (c), F.R.Civ.P.; see Gridley v. Cunningham, 550 F.2d 551, 553-54 (8th Cir. 1977): Gannett Co. v. Regis- ter Pub. Co., 428 F.Supp. 818, 823 (D. Conn. 1977); Wassel v. Eglowsky, 399 F.Supp. 1330, 1358-59 (D. Md. 1975), aff'd, 542 F.2d 1235 (4th Cir. 1976); cf. Straley v. D-18 Universal Uranium and Milling Corp., 289 F.2d 370, 372-73 (9th Cir. 1961) (relation back of amendment stating claim under § 12 (1) ). It is undisputed that plaintiffs’ original complaint, filed on February 26, 1976, was timely. The complaint al- leged violations of § 10 (b). Rule 10b-5, and Minnesota securities law. The § 12 (2) claim was raised in subsequent amendments to the complaint filed on December 26, 1978, and May 18, 1979. It is also undisputed that the § 12 (2) claim “arose out of the conduct, transaction, or occurrence set forth . . . in the original pleading.” Rule 15 (c), F.C.Civ.P. Accordingly, the § 12(2) claim -was timelv raised because the amendments related back to the date of the original pleading. Id. See generally C. Wright & A. Miller, Federal Practice and Procedure § 1497 at 499- 500 (1971). Nor are we persuaded that plaintiffs’ claim under § 1? (2) should be barred because no tender of the limited partnership units was made until shortly before trial. No time for tender is prescribed by § 12(2) and this circuit has held that a tender prior to or during trial satisfies the requirement. Gridley v. Cunningham, supra at 554; see also Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034-35 (2d Cir. 1979). IT. Before addressing damages. we briefly consid-r and re- ject two tangential points raised by Loftsgaarden. One noint concerns an allegedly preiudicial remark made by the court to Loftsgaarden’s counsel. At the end of the first dav of trial, the court limited counsel's cross-examination of Crawford to an amount of time equal to that consumed D-i9 by plaintiffs in their direct examination. When counsel for Loftsgaarden balked, the court stated, “I don’t want to be critical but you spent 15 minutes on minor historical meetings.” T. 143. The following day, Loftsgaarden moved for a mistrial alleging the court’s comment constituted ju- dicial misconduct, irreparably prejudicing the rights of the defendants. It is claimed the lower court erred in denying the motion. We cannot say that such an incidental remark in any way reflected any conscious or unconscious desire on the part of the trial court to deprive Loftsgaarden of a fair trial. Cf. Agee v. Lofton, 287 F.2d 709, 710 (8th Cir. 1961) (“[{The trial judge’s] remarks making light of the plaintiffs and their witnesses were, in our opinion, cal- culated to prevent the plaintiffs from having the sort of trial to which they were legally entitled.”). Furthermore, any possible prejudice was cured by the court in its in- structions to the jury.” The second point raised is that the lower court abused its discretion in permitting plaintiffs to introduce evidence of a prior fraud cOmmitted by Loftsgaarden. After Lofts- gaarden denied any intent to defraud plaintiffs, the court permitted plaintiffs to rebut this testimony by introducing evidence of a 1976 state court determination that Lofts- gaarden had defrauded a party in a real estate transaction. The lower court concluded that the evidence was proba- tive of intent and that its value in this regard outweighed any prejudice. See Fed.R.Evid. 403. A limiting instruction **The jury was told: It is the duty of the Court to admonish an attorney who, out of zeal for his cause, does something which is not in keeping with the rules of evidence or procedure. You are to draw no inference against the side to whom an admonition of the Court may have been addressed during the trial of the case. T. 782. D-20 was given in which it was made clear that the evidence “was received only as it may relate to [Loftsgaarden’s] intent and for no other purpose.” Once Loftsgaarden de- nied any intent to defraud, it was within the trial court's discretion to permit evidence of the prior fraud. See F ed. R Evid. 404 (b). We hold that the court did not abuse ‘ts discretion in allowing this evidence to be placed before the jury. IV. The most hotly contested issue !n this case concerns the district court”s ruling that Loftsgaarden could not intro- duce any evidence about the tax benefits accruing to plain- tiffs as a result of their participation in Alotel Associates. Loftsgaarden argues that the evidence was crucial to the ‘csue of whether plaintiffs. regardless of whether they had been defrauded, suffered any actual damages. A. “[D]amages for securities fraud are determined in ac- cordance with the extent to which false and misleading in- formation actually harmed the complaining party... .” Shapiro v. Midwest Rubber Reclaiming Co., 626 F.2d 63. 69 (8th Cir. 1980), cert. denied, 449 U.S. 1079 (1981): cf. 15 U.S.C. § 78bb (a) (limiting nlaintiff’s recov- ery under the 1934 Act to “actual damages on account of the act complained of”). Failure by the complaining party to prove actual damages is fatal to the party’s cla'm. Shapiro, supra at 70. Generally, the out-of-pocket measure of damages is applied in securities fraud cases, usually awarding plaintiff (in the case of a defrauded purchaser) the difference between the purchase price of the security D-21 and its actual value on the date of purchase.“ Harris v. American Investment Co., 523 F.2d 220, 225 (Sth Cir. 1975), cert. denied, 423 U.S. 1054 (1976). This measure, however, is “not a talisman”; the function of the court “is to fashion the remedy best suited to the harm.” Gar- natz v. Stifel, Nicolaus & Co., 559 F.2d 1357, 1360 (8th Cir. 1977), cert. denied, 435 U.S. 951 (1978). According- ly, a rescissional remedy, id., or some other measure of damages in the nature of restitution may be applied. Cf. Myzel v. Fields, 386 F.2d 718, 742-43 (8th Cir. 1967), cert. denied, 390 U.S. 951 (1968) (“Rescission calls for cancellation of the bargain, and the return of the parties to the status quo ante; . . . [b]ut where there exists no market value of the stock, the stock is no longer in exist- ence, and there clearly has been a fluctuation in value. . ., then what restitutional damages are to be awarded must depend upon the facts of the particular case.”). The actual damages principle requires that a rescission- al or restitutional award be “reduced by any value re- ceived as a result of the fraudulent transaction.” Garnatz v. Stife’, Nicolaus & Co., supra at 1361. This principl- applies in the instant case not only to the § 10 (b) and Rule 10b-5 claims, but also to the claims under * 12(2) and Minnesota law. Under § 12(2), the defendant guilty of prospectus fraud shall be liable to plaintiff, who may sue either at law or in equity in any court of competent jurisdiction, to recover the cousidera- **Where fraud is found to have affected the open market price of the security because others were influenced by the same misrepresentations made to the person seeking recovery, the measure applied is the differ- ence between the purchase price and the actual value on the date of discovery of the fraud. Harris v. American Investment Co., 523 F.2d 220, 226 (8th Cir. 1975), cert. denied, 423 U.S. 1054 (1976). D-22 tion paid for such security with interest thereon, less the amount Of any income received thereon, upon the tender of such security, Or for damages if he no longer owns the security. 15 U.S.C. § 77] (emphasis added). Similarly, the Supreme Court of Minnesota holds that the defrauded party is en- titled to no recovery unless plaintiff is able to prove that he suffered actual damages as a result. Berg v. Xerxes- Southdale Office Bldg. Co., 290 N.W.2d 612, 615 (Minn. 1980): cf. Minn. Stat. § 80A.23 (limiting recovery to ac- tual damages sustained for violation of state securities laws). At trial Loftsgaarden attempted to show that in spite of any fraud he may have perpetrated, plaintiffs suffered no actual damages because of the tangible economic ben- efit they derived from the limited partnership units in the form of large tax write-offs which they used to offset their sizeable professional incomes. Loftsgaarden’s offer of proof indicates that he was prepared to introduce evidence that three of the four plaintiffs suffered no actual damages on account of the tax savings they experienced from th ‘nvestment. The district court stated that it was “not going to get into a lot of complicated tax testimony” ur 23). and disallowed the evidence, dismissing the argument as “sophistic malarky.” D.R. 438. The court concluded that the limited partnership units were worthless and in- structed the jury that if they found liability. the measure of camages would be the amount “which the plaint'ffs paid cut in reliance upon the fa'sc representations cf [the] defendant .. .” T. 805. We take no issue with the court’s decision to apply what was essentially a resc'ssOrv wr Le A ee i lL cl D-23 measure of damages in this case,” but we hold that the court committed reversible error in refusing to allow proof of any economic benefits received by plaintiffs on account of the investment and in failing to instruct the jury that the damage award must be reduced by any value shown to have been received by plaintiffs. V. We have already explained the basic principles of real estate tax shelter investment in Part I of this opinion. The aim is to generate large amounts of artificial losses in the early years of the investment which may be passed on to the limited partners for use in offsetting their out- side income. The ultimate goal, of course, is to establish a positive cash flow and become an income-producing en- terprise, which income—just as the early losses—is dis- tributed proportionately to the limited partners. Thus the benefits from a profitable real estate tax shelter invest- ment are two-fold, offering tax savings to the lim‘ted part- ner in its early years and generating income in later years. But unlike a corporate shareholder, for example, even if the enterprise fails to become profitable, the limited partner clearly may have something of value because of the investment’s unique tax treatment: A limited partner who has been misled into investing in an unprofitable real estate venture may be in a better position than a shareholder in an unprofitable **Accordingly, there is no merit to Loftsgaarden’s contention that the lower court erred in failing to submit to the jury the issue of when plaintiffs discovered the fraud. Loftsgaarden contends that jury determination of the question was “crucial to the issue of damages.” Brief at 38. But in the context of damages, the time of discovery of the fraud is crucial only where the out-of-pocket measure is to be applied and the trier of fact is obliged to value the security as of this date. D-24 corporation. By use of depreciation, real estate limited partnerships can generate a substantial tax loss while actually taking in sufficient cash to cover part- nership expenses. This tax loss can be passed through to the partners as a shelter for other taxable income. In the extreme case where the partnership’s gross rents are exactly equal to its expenditures, the tax loss con- tinues to make the partnership an attractive invest- ment. On the other hand, the stock of a corporation having no profit or pt! gspects of profit would be worthless. and a shareholder in that corporation would value any recovery in a civil suit more than his investment. Note, Real Estate Limited Partnerships and Allocational Efficiency: The Incentive to Sue for Securities Fraud, 63 Va.L.Rev. 669, 672-73 (1977) (footnotes omitted). We note that the above excerpt discusses the value of the limited partnership interest in a break-even investment. Whether or not the costs exceeded the benefits in the in- stant case where the enterprise never even reached the break-even point cannot be determined absent evidence on the matter. The few recent cases addressing the issue hold that in private securities fraud actions brought by limited part- ners in real estate tax shelter investments, consideration of tax benefits rece'ved by the limited partners is relevant to the question of whether plaintiffs suffered any actual damage. In Br‘dgen v. Sctt, 456 F.Supp. 1048 (S.D. Tex. 1978), limited partners sued the ceneral partner under § 10 (b) and Rule 10b-5 after they received tax benefits. but no profit upon a speculative real estate investment. D-25 The court permitted defendant to introduce evidence of the tax aspects of the investment: Requiring the jury or this Court to try this case with- out reference to the tax consequences of the transac- tion would be requiring the jury and the Court to live in an artificial “never-never land.” The plaintiffs’ position that the tax consequences of this transaction should be ignored is simply not realistic and is tan- tamount to requesting this Court and the jury to try this case blindfolded. Id. at 1061. The court held that application of a rescissory damage measure would require reduction of the price paid by the specific value received by plaintiffs in the form of tax write-offs. Jd. at 1060. In Smith v. Bader, 83 F.R.D. 437 (S.D.N.Y. 1979), the court permitted discovery of plaintiffs’ tax returns, holding that “knowledge of plain- tiffs’ income tax rate and the net value of their investment, along with other information. may be needed to calculate any tax benefits which may mitigate damages” Id. at 439. Similarly, in Berg v. Xerxes-Southdale Office Bldg. Co supra, at 615, the court held that in valuing the interest in a real estate limited partnership, income tax considera- tions are relevant. Cf. Dupuy v. Dupuy, 551 F.2d 1005, 1925 (Sth Cir.), cert. denied, 434 U.S. 911 (1977): Bay- oud v. Ballard, 404 F.Supp. 417, 426 (N.D. Tex. 1975); Hickman v. Groesbeck, 389 F.Supp. 769, 779-80 (D. Utah 1974). Indeed, the tax aspects of a real estate limited partnership investment are of such tangible economic ben- efit to the investor that damages are recoverable under the securities laws where, on account of fraud by the offeror, tax write-offs taken by the investor are disallowed by the D-26 Internal Revenue Service. Sharp v. Coopers & Lybrand, supra. Thus, we acknowledge the value of the tax deduc- tions generated by such an investment and hold that the strictly compensatory nature of damages awardable in private securities fraud actions requires that such value be taken into account ir determining whether and to what extent damages were inflicted upon plaintiffs. The lower court’s allusion to the complexity of evidence relating to plaintiffs’ tax savings is not a viable reason for precluding such evidence in light of Norfolk & Western R. Co. v. Liepelt, 444 U.S. 490 (1980). In the context of a wrongful death action under the Federal Employer’s Lia- bility Act (FELA),” the Court held that it was error to preclude evidence of the income tax payable on the de- cedent’s past and estimated future earnings and to refuse to instruct the jury that the award of damages would not be subject to income taxation. While admitting that many variables affect the amount of a wage earner’s future ‘ncome tax liability, the Court observed that the calcu- lation was no more uncertain or complex than that al- ready made by juries in determining future earnings. The Court concluded. “We therefore reject the notion that the ‘ntroduction of evidence describing a decedent's estimated after-tax earnings is too speculative or complex for a jury.” Id. at 494. In the case before us, it is likely that the jury will not even be faced with the vagaries of calculating future in- come tax liability. Loftsgaarden’s offer of proof indicated that he was prepared to show, based on an analysis of plaintiffs’ income tax returns for the years 1973 to 1978, that three out of the four plaint'ffs were net dollars ahead 45 U.S.C. $51 ef seq. - . D-27 after foreclosure of the investment. All plaintiffs except Dr. Randall reported the proceeds from the foreclosure in their 1978 tax returns.” Thus, the net affect of the invest- ment is subject to proof without the need for the jury to speculate about the impact of any future recoupment of the losses deducted. This is not to say that the present damage calculation is entirely devoid of speculation. Plaintiffs did indicate that their returns for the years 1973 to 1978 were undergoing audits by the Internal Revenue Service. Evi- dence of the audit and expert opinions as to its likely re- sults are admissible at the retrial on damages. Certainly the possibility that past tax deductions will be disallowed is relevant to the determination of the extent of any bene- fit actually received by plaintiffs from those deductions. The jury is entitled to determine whether and to what ex- tent there would be a disallowance of deductions. We wish to clarify that the impact of our holding is not nearly so far-reaching as plaintiffs predict. They argue that because there are tax consequences to any investment one makes, evidence of those consequences will not figure in every securities fraud case. Bu [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0440%3A02. Public record. Not legal advice.