Opposition Brief — Randall v. Loftsgaarden

Supreme Court, U.S,

FILED

OCT 22

No. 85-519 JOSEPH F. SPANIOL, JR.

CLERK

IN THE

Supreme Court of the United States

October Term, 1985

DR. WILLIAM C. RANDALL, DR. 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 RESEARCH COMPANY, a Minnesota corpora-

tion; and 2361 BUILDING CORPORATION, a Minne-

sota corporation,

Respondents.

RESPONDENT'S BRIEF IN OPPOSITION

B. J. Loftsgaarden

1965 Bayard Avenue

St. Paul, Minnesota 55116

Telephone: (612) 698-5698

Attorney pro se

1985—Northwest Brief Printing Co., 3010 2nd St. No., Minneapolis 55411—588-7506

~ BEST AVAILABLE COPY "7

REASONS FOR DENYING THE WRIT

1. Calculation of damages the only issue.

2. The fact issues make this case one of narrow applica-

tion. All Petitioners had experienced complete recapture

and had their tax returns audited and closed. These facts

distinguish this case from the broad field of cases where

questions of amended returns and “illusory damages” have

arisen.

3. Actual out-of-pocket loss by the group of Petitioners

is small, ($14,477.00) including interest, yet two trials

and two appeals have resulted in award of $75,000.00 at-

torneys’ fees to Petitioners’ lawyers.

4. The decision of the Eighth Circuit Court with the

respect to the calculation of damages is the appropriate

remedy in this particular case.

5. There is no conflict between the decision of the

Eighth Circuit and the Ninth Circuit or Second Circuit.

TABLE OF CONTENTS

Page

REASONS FOR DENYING THE WRIT ......... i

Be ID 6. wc wwe cca wdvdccocetees iii

TABLE OF AUTHORITIES .............cce50- iil

RESPONDENT'S BRIEF IN OPPOSITION ....... l

POE VON Perse due wure es beep he décedeve'es

REASONS FOR DENYING THE WRIT:

1. Caculation of Damages the Only Issue ......

Be PR CED. occ cacecevccevecceces

3. Actual Damages Small; Costs High ........

4. The Court of Appeals Ruling was Correct ....

5. There is No Conflict Between the Decision of

the Eighth Circuit and the Ninth Circuit or Sec-

EE Cd 6 0680 ab UU EES eed ed dedede c's

aaa nn en

TABLE OF AUTHORITIES

Cases:

Affiliated Ute Citizens v. United States, 406 U.S. 128,

Se ME SURG Te UlWecUb elect ceiwebicdcdic

Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir. 1982)

Austin v. Loftsgaarden, 786 F.2d 949 (8th Cir. July

BG, EGGS) es ic » & 9 © ii, 13, 13, 14. T7,

Borovoy v. Burser Realty Corp., 86 Mich. App. 732,

ee Cae GP EUUED bocce ciceccuecevucess

Bridgen v. Scott, 456 F. Supp. 1048 (S.D.Tex. 1978)

eee MbEretereeres eet ieee be 12, 14,

Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984)

Oi Caen Pedinedteairiwe6 Wee's’: 65s « 6, 8, 9, 13,

13

18

10

14

18

13

15

17

Cant v. A.C. Becker & Co., 384 F. Supp. 814 (N.D.

SD Uo 00 bh os os ods be Chea eee ue.

Cereal Bi-products Co. v. Hall, 16 Il. App.2d 79, 147

WE ME ASS Ok 0- 6 kt ske bkdbGn db aedenetic cos.

Chris-Craft Industries, Inc. v. Piper Aircrafter Corp.,

384 F.Supp. 507 (S.D.N.Y. 1974), modified. 516

F.2d 172 (2d Cir. 1975), rev'd on other grounds,

ok Og, REPEL EPR erro eee

Cooper v. Hallgarten & Co., 34 F.R.D. 482 (S.D.NLY.

SPN AG kAR Een és ddauk dbchided es Side bd:

Dupuy v. Dupuy, 551 F.2d 1005 (Sth Cir.), cert. de-

nied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197

GEUCCD .o distal <scmah Gok dutedaih Je catebvcns oe.

Eisenberg v. Gagnon, 766 F.2d 770 (1985) ........

Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357 (8th

Cir. 1977, cert. denied, 435 U.S. 951 (1978) ...5.

Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d

Ss WOE ROA a Wed 20a 640k y 6 cdeedadin cco,

Globus v. Law Research Serv., Inc., 418 F.2d 1276

(2nd Cir.), cert. denied, 397 U.S. 913 (1970) ..4.

G. & R. Corp. v. America Sec. Trust Co., 523 F 2d

Ee ee Wi ME a bia Wis ninco Keene des

Harris v. American Investment Co., 523 F.2d 220 (8th

Cir. 1975), cert. denied, 423 U.S. 1054 (1976) ..

Harris v. Metropolitan Mall, 334 N.W.2d 519 (Wisc.

tg SEE Ee Pt ECT SST Pent tae ta

Hayden v. McDonald, 742 F.2d 423 .............

Hillsboro National Bank v. Commissioner, 460 U.S.

370, 103 S.Ct. 1134, 75 L.Ed.2d 130 (1983) ....

Hokama v. B. F. Hutton & Co., Inc., 566 F.2d 836

GPE is shh cd dvel 6 akueds od ct uca coe

kee ee eee, 12,

lowa-Des Moines National Bank v. Schwerman. 288

a LBS ee ae

iv

John Hopkins Univ. v. Hutton, 297 F. Supp. 1165 (D.

Md. 1968), rev’d on other grounds, 422 F.2d 1124

(4th Cir. 1970), cert. denied, 416 U.S. 916 (1974)

Marbury Management, Inc. v. Kohn, 470 F.Supp. 509

(S.D.N.Y. 1979), aff'd in part, rev’d in part, 629

F.2d 705 (2d Cir.), cert. denied, 449 U.S. 1011, 101

S.Ct. 566, 66 L.Ed.2d 469 (1980) .............

1 Mertens, Law of Federal Income Taxation, #7.34 at

cei OS ek Se

Murphy v. Cady, 30 F.Supp. 466 (D. Me. 1939), aff’d,

113 F.2d 988 (1st Cir.), cert. denied, 311 U.S. 705

ala A SS ie ta aE Sa 4,

Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert.

denied, 390 U.S. 951 (1968) .........cccccccces

Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38

(2d Cir. 1977), cert. denied, 439 U.S. 1039 (1978)

ak abe ae ons eb Be bas Khao 8a i's Ce 4,

Salcer v. Envicon Equities Corp., 744 F.2d 935 (2d

Ch Se x 6 Wetds Keen G's > be th, 93, 36, 87,

Shapiro v. Midwest Rubber Reclaiming Co., 626 F.2d

63 (8th Cir. 1980), cert. denied, 449 U.S. 1079

CREE ee ee PD ooo nw ec vececcccces

Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir.

1981), cert. denied, 455 U.S. 938, 102 S.Ct. 1427.

Oe ee I a oo vs bab see x 6 080

Smith v. Bader, 83 F.R.D. 437 (S.D.N.Y. 1979) .. 12,

Spatz v. Borenstein, 513 F. Supp. 571 (N.D. Ill. 1981)

Western Fed. Corp. v. Erickson, 739 F.2d 1439 (9th

i: MI os io ine wo oe boasts 6, 8, 13, 14, 15, 16,

Wiesenberger v. W. E. Hutton & Co., 35 F.R.D. 556

5

17

SE EE Gk ccs acGade bhebadac ee ee eur 14-15

IN THE

Supreme Court of the United States

October Term, 1985

No. 85-519

DR. WILLIAM C. RANDALL, DR. ROGER E. AUSTIN,

DR. TOM W. ANDERSON and DR. MYREL A.

NEUMANN,

Petitioners,

Vv.

B. J. LOFTSGAARDEN; ALOTEL INCORPORATED, a

Minnesota corporation; PROPERTY DEVELOPMENT

AND RESEARCH COMPANY, a Minnesota corpora-

tion; and 2361 BUILDING CORPORATION. a Minne-

sota corporation,

Respondents.

RESPONDENT’S BRIEF IN OPPOSITION

Respondent respectfully prays that a writ of certiorari

to review the en banc judgment and opinion of the United

States Court of Appeals for the Eighth Circuit entered

in this proceeding on July 16, 1985 be denied.

STATEMENT OF THE CASE: ADDITIONAL FACTS

All of Petitioners’ investments went to Alotel Associates,

a Limited Partnership whose sole asset was a single motel

including all furnishings. Alotel Associates is not a party

to these proceedings. No proof was offered to support any

assertions that the Respondent profited. The project came

2

up short on needed construction capital but was completed

by Respondent at his expense.

The four Petitioners all purchased their 4% partnership

interest sometime in 1973 and held them through final

foreclosure of the project in 1978. Holders of the rest of

the 20% units did not pursue any claim, although ali were

named as original parties. They, like Petitioners, had re-

covered substantially all or more than all of their invest-

ment through the promised tax benefits. The Petitioners

received tax benefits from the project in each of the years

from 1973 thru 1978 and paid their full taxes arising out

of recapture when the property was foreclosed. The Peti-

tioners have stipulated and the Court has found that even

after payment of recapture taxes, Petitioners have retained

permanent net tax benefits equal to between 84% and

108% of their investment. Full audits have been made and

closed by the I.R.S. Calculations from the Petitioners’ tax

returns made by a C.P.A. and adopied by the Court show

only a combined net $1,134.00 not sw recovered, and in-

terest on these amounts to be $13,239.00 (all four awards

combined). The total balance in the amount of $14,477.00

was doubled to grant the Petitioners an additional amount

(assuming they are in the 50% bracket still) to allow for

taxes that would accrue on this additional recovery. Ap-

pendix A-22.

No tender of any of the securities nor any rescissionary

demands were made by any of the Petitioners at any time

prior to the foreclosure, and in fact, rescission was not de-

manded until shortly before the first trial when the Petition-

ers amended their claim for relief. At that time, and ever

since, the Petitioners have had nothing to return in exchange

for their claimed refund, as all of the property in the part-

3

nership had been foreclosed and the time for redemption

had expired.

Respondent Loftsgaarden was General Partner until Sep-

tember 1975, the hotel having opened in June 1974. A

mutual separation agreement was entered into and a suc-

cessor General Partner was appointed by the limited part-

ners. Loftsgaarden received nothing for his services, as

compensation depended upon profits. Furthermore, he was

not reimbursed for substantial monies advanced in behalf of

the partnership. The partnership operated the property un-

til sometime in 1978 without Respondent.

In accordance with the Offering Memorandum, each of

the limited partners were required to sign a document cer-

tifying as follows:

a. He is aware that no federal or state agency has made

any findings or determination as to the fairness for

public investment, nor any recommendation nor en-

dorsement of Units;

b. He recognizes that the Partnersiip has only recently

been organized and has no financial or operating

history and, further, that the Units as an investment

involve a high degree of risk;

c. He is aware that there is no public market for Units

and that it may not be possible readily to liquidate

his investment;

d. He undersiands that the Units have not been regis-

tered with the Securities and Exchange Commission

or under the securities laws of any state. The Units

are being acquired for investment purposes and not

for purposes of resale or other distribution.

e. He has carefully reviewed the Articles and, in mak-

ing an investment in the Partnership, has relied sole-

ly thereon and on his independent investigation.

“4

f. He has a net worth in excess of $200,000; or some

portion of his income is subject to Federal and State

income tax at a rate of 50% or more.

g. He isa resident of the State of Minnesota.

All of the named corporate Defendants are subchapter

“s” corporations, wholly owned by Loftsgaarden, who was

also the sole individual General Partner. For these reasons,

the Defendants will be referred to herein as “Respondent”

or “Loftsgaarden”.

REASONS FOR DENYING THE WRIT

1. Calculation of Damages the Only Issue.

Respondent does not request review by the Supreme

Court of the United States. The questions presented by the

Petitioners relate only to damage calculations. Referring

only to cases cited in the Circuit Court of Appeals opinion,

the following were all the subject of Petition for Certiorari,

which was denied:

Glo5us v. Law Research Serv., Inc., 418 F.2d 1276

(2d Cir.), cert. denied, 397 U.S. 913 (1970);

Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38

(2d Cir.), cert denied, 439 U.S. 1039 (1978);

Murphy v. Cady, 30 F. Supp. 466 (D. Me. 1939),

aff'd, 113 F.2d 988 (1st Cir.), cert denied, 311 US.

705 (1949);

Shapiro v. Midwest Rubber Reclaiming Co., 626 F.2d

63 (8th Cir. 1980), cert. denied, 449 U.S. 1079

(1981); cf. 15 U.S.C. § 78BB (a);

Harris v. American Investment Co., 523 F.2d 220

(8th Cir. 1975), cert. denied, 423 U.S. 1054 (1976);

5

Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357 (8th

Cir. 1977), cert. denied, 435 U.S. 951 (1978);

Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert.

denied, 390 U.S. 951 (1968).

The following cases from the Petitioners’ brief resulted

in a denial of Certiorari:

John Hopkins Univ. v. Hutton, 297 F. Supp. 1165 (D.

Md. 1968), rev’d on other grounds, 422 F.2d 1124

(4th Cir. 1970), cert. denied, 416 U.S. 916 (1974);

Janigan v. Taylor, 344 F.2d 781 (1st Cor.), cert. de-

nied, 382 U.S. 879 (1965).

The instant case, while of significance to the litigants,

just does not produce any issues of general interest beyond

Court of Appeals level. The parties have been afforded am-

ple review.

2. Narrow Application.

The instant case involves facts which narrow and limit

the issue with respect to the deductibility of tax benefits

from the award. All of the Petitioners held an interest in a

partnership that lasted from sometime in 1973 through

1978 (in the case of one of the Petitioners 1979), at which

time the property was foreclosed and the Petitioners experi-

enced a complete recapture. Out of a total of 25 limited

partnership units issued, only holders of 4144 units chose to

pursue litigation. The others recognized that they had, in

fact, gained substantial benefits despite the foreclosure. In

Austin v. Loftsgaarden, 786 F.2d 949 (8th Cir. July 16,

1985), the Tax Division and the S.E.C. contended that the

plaintiffs’ tax benefits “may” prove to be illusory because

6

they “may” experience recapture upon sale or other dis-

position of the hotel. The Court said at Appendix A-11:

“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 the investments in the Associates. (emphasis

ours)... . All of the plaintiffs in this case have already

experienced all possible recapture when the hotel was

foreclosed upon in 1978... . . All of the plaintiffs’ tax

returns from the relevant tax years have already been

audited and are now closed”.

Thus the ruling in the instant case is limited to the nar-

row fact situation described above. The review of this case

would not address the broader issues addressed by the two

principal cases upon which the Petitioners rely: Burgess v.

Premier Corp., 727 F.2d 826, and Western Federal Corp

v. Erickson, 739 F.2d 1439 (9th Cir. 1984). These are

distinguished from the present case because in those cases

it was held that amended returns would have to be filed

under the tax benefit rule.

3. Actual Damages Small; Costs High.

Respondent has been ordered to pay to Petitioners’ at-

torneys for four different proceedings, two in the lower

court and two at the appellate level, a total of $75.000.00

plus costs in the amount of $8,278.32 making the total

$83,278.32, The breakdown of fees and costs awarded is

as follows:

FEES FEES COSTS COSTS ANDERSON,

RANDALL NEUMANN RANDALL AUSTIN, NEUMANN

Ist Trial $10,000.00 $15,000.00 $1,308.62 $2,210.53

Ist Appeal $18,000.00

2nd Trial $10,000.00 $14,000.00 $3,111.30

2nd Appeal $ 4,000.00 $4, 000.00 $1,647.87

TOTAL FEES $75,000.00 TOTAL COSTS $8,278.32

7

This is in addition to the extensive legal fees already

incurred by Respondent for its own attorneys. As against

the foregoing figures, the actual damages of the four Peti-

tioners is as follows:

Randall award $ 253.00

Anderson awarc $ 9,395.00

Neumann award $ 992.00

Austin award $ 3,833.00

TOTAL AWARD $14,473.00

(Of the above amounts, $13,339.00 is interest). Appen-

dix A-22.

Respondent submits that the proceedings have involved

time and expense way beyond the amount of attention and

time that should have been devoted to settling the same. As

Judge Lord said in his order,

“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.”

(Emphasis ours). Appendix C-3.

The projected profit referred to in the prospectus never

materialized. Loftsgaarden did not profit in any way from

the venture. Instead, as General Partner, he paid extensive

obligations of the partnership, including $46,000.00 unv

paid interest after the partnership defaulted.

Respondent states to the court that he cannot continue

to defend these proceedings, paying legal counsel on both

sides. He has thus determined to proceed at this point Pro

Se. Respondent suggests to the court that there is an addi-

tional inducement to prolonging and continuing the pro-

ceedings if attorneys’ fees in substantial amounts are award-

ed at each juncture.

8

This case may well have come to rest before this point

but for the incentive on the part of Petitioners’ counsel to

continue the litigation. Respondent is now in the process

of paying the amounts adjudged against him, including all

costs and attorneys’ fees. This should end this over-pro-

tracted litigation.

Plaintiffs have lamented about the unjust “profit” they

claim was retained by Respondent. The evidence and find-

ings do not support this argument. The only finding about

profit relates to a discrepancy between the schedule of pro-

jected application of funds in the offering memorandum

and a projection in the first mortgage application. Appen-

dix E-7 (0).

In Austin v. Loftsgaarden (2nd decision supra) the Court

said:

“We reject plaintiffs claim that we should ignore their

tax benefits because otherwise the defendants will un-

justly “retain” the consideration previously paid by the

plaintiffs. First of all, it does not appear that the de-

fendant has “retained” any of plaintiffs consideration:

rather these monies were paid to the partnership and

were invested in the project”. Appendix A-13.

Respondent has incurred great losses both in the original

partnership and in the defense of this action. Petitioners’

counsel continue to argue the opposite without any factual

support.

4. The Court of Appeals Ruling Was Correct.

Petitioners rely on Western Fed. Corp. v. Erickson. 739

F.2d 1439 (9th Cir. 1984), and, Burgess v. Premier Corp.,

727 F.2d 826 (9th Cir. 1984), sin which cases the Court

discussed the damages being “illusory” and held that the

tax consequences will “wash out” any prior tax savings.

9

In Austin v. Loftsgaarden (2nd decision supra), the

Court clearly distinguished these cases as follows:

“We need not address the contention of the Tax Divi-

sion and the S.E.C. that the tax consequences of the

rescissionary award will ‘wash out’ any prior tax sav-

ings, because we are not presented with such a situa-

tion in this case”. Appendix A-12.

In making this distinction in Austin v. Loftsgaarden

(2nd decision 1985 supra), the Court relied upon Hillsboro

National Bank v. Commissioner, 460 U.S. 370, 103 S.Ct.

1134, 75 L.Ed.2d 130, 142-44 (1983); Salcer v. Envicon

Equities Corp., 744 F.2d at 943; 1 Mertens, Law of Fed-

eral Income Taxation, #7.34 at 7-115, #7.37 at 7-130.

In Austin v. Loftsgaarden (2nd decision 1985 supra),

the Court went on to say at Appendix A-12:

“The ‘tax benefit rule’ does not require elimination of

tax benefits already received. See Hayden v. McDon-

ald, 742 F.2d 440. Rather it provides that a tax payer

who claims 2 deduction resulting in a tax benefit one

year and who later obtains a recovery or repayment

in a later year must include the recovery or repayment

as ordinary income in the year of recovery”. (Hayden

v. McDonald, reversed in part).

Especially important is the distinguishing feature between

the instant case and the Burgess case in that the Burgess

case involved a fraudulent tax shelter. The only questions

raised in Austin v. Loftsgaarden was with the respect to

the issuing of the Offering Memorandum; it was conceded

by all that the tax shelter was in itself entirely lawful and

that the Government has audited all returns and accepted

the same.

10

Austin v. Loftsgaarden (2nd decision 1985 supra), relies

on Salcer v. Envicon Equities Corp., 744 F.2d at 943:

“Nor can we agree with the notion that a ruling makes

‘the Government the banker for fraudulent tax shelter

activity.’ Burgess v. Premium Corp., supra, 727 F.2d

838. As Judge Broderick noted there was no such ac-

tivity in this case; the fraud, if any, pertained only

to the investment aspects of the Greenspoint Project.

The Government got the residential development that

it hoped to encourage by offering the tax benefits

taken by the plaintiffs. Thus it is ‘banking’ precisely

what it agreed to ‘bank’. There is suggestion that the

project did not meet Federal requirements as a viable

housing development entitling its owners to tax bene-

fits”.

“There is no legal justification for awarding a party

damages to which he is not entitled merely to provide

revenue for the Government to tax”. Appendix A-14.

In answer to the Petitioners’ argument that the words

“actual damages” do not appear in the 1933 Act, the Court

in Austin v. Loftsgaarden (2nd decision) says:

“Although the words ‘actual damages’ do not appear

in the 1933 Act, the Courts have nonetheless applied

the actual damages principle of section 28(a) to bar

punitive damages under section 17(a) of the 1922

Act, Globus v. Law Research Serv., Inc., 418 F.2d

1276, 1278, 1283-86 (2d Cir.), cert. denied, 397 U.S.

913 (1970), and have construed the rescission and

restitution remedy provided by section 12 (2) as sub-

stantially equivalent to the damages permitted under

section 28(a). Affiliated Ute Citizens v. United States,

406 U.S. 128, 155 (1972). The goal of rescission un-

der section 12 (2) is to return the parties to the status

quo ante, ‘and hence a plaintiff can recover no more

11

than his or her “net economic loss”,’ i.e., ‘actual dam-

ages’”. 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). Appendix A-8, A-9.

In regard to tax benefits received and “actual damages”

see Salcer v. Envicon Equities Corp., 744 F.2d 935, 940

(2d Cir. 1985):

“‘Actional damages’, as used in the Exchange Act,

means ‘compensatory damages,’ id. and hence a plain-

tiff cannot recover more than his or her ‘net economic

loss." Marbury Management, Inc. v. Kohn, 470 F.

Supp. 509, 516 (S.D.N.Y. 1979), aff’d in part, rev'd

in part, 629 F.2d 705 (2d Cir.), cert. denied, 449 U.S.

1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980). It is

not within our power to ignore benefits bargained for

and received by plaintiffs as a result of the transaction

at issue, which represent real economic value mitigat-

ing any loss they may have suffered.”

“The importance of this aspect of the investment is

recognized in decisions awarding damages for failure

of the tax advantages of shelters to live up to the sell-

er’s representations. See, e.g., Sharp v. Coopers & Ly-

brand, 649 F.2d 175 (3d Cir. 1981) (holding account-

ing firm liable for acts of employee in preparing tax

opinion letter), cert. denied, 455 U.S. 938, 102 S.Ct.

1427, 71 L.Ed.2d 648 (1982).”

Austin v.-Loftsgaarden (1985) 2nd decision:

“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); Chris-Craft Industries, Inc. v. Piper Air-

crafter Corp., 384 F. Supp. 507, 527 (S.D.N.Y. 1974),

modified, 516 F.2d 172 (2d Cir. 1975), rev’d on other

12

grounds, 430 U.S. 1 (1977). Because plaintiffs were

not deprived of the use of the entire amount of their

investments over the ten year period, prejudgment in-

terest 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), aff'd, 113 F.2d 988 (1st Cir.), cert. denied,

311 U.S. 705 (1940). Appendix A-19, A-20.

Cases cited by Petitioners that support Respondent:

Smith v. Bader, 83 F.R.D. 437;

Bridgen v. Scott, 456 F. Supp. 1048 (S.D. Tex. 1975);

Houlihan v. Anderson-Stokes, 78 F.R.D. 232 (1978):

Hokama v. B. F. Hutton & Co., Inc., 566 F.2d 836

(1983).

Cases cited by Petitioners that are not security cases and

therefore do not involve a tax shelter security produced

and marketed by a defendant:

Iowa-Des Moines National Bank v. Schwerman, 288

N.W.2d 198;

Harris v. Metropolitan Mall, 334 N.W.2d 519 (Wisc.

1983);

G. & R. Corp. v. American Sec. Trust Co., 523 F.2d

1164 (C.D. Cir. 1975);

Cereal Bi-products Co. v. Hall, 16 Ill. App.2d 81, 147

F.2d 383.

The following cases cited by Petitioners are distinguished

in their fact situation in that they do not present facts in-

volving foreclosure, recapture, and previously paid taxes:

13

Eisenberg v. Gagnon, 766 F.2d 770 (1985):

Borovoy v. Burser Realty Corp., 86 Mich. App. 732,

273 N.W.2d 545 (1979);

Spatz v. Borenstein, 513 F. Supp. 571 (ND. II.

1981).

5. There Is No Conflict Between the Decision of the

Eighth Circuit and the Ninth Circuit or Second

Circuit.

Petititoner urges that the Court consider this issue to

resolve conflicts between Circuits.

The real distinction between Burgess and Austin is found

in Burgess itself where Burgess considered the Austin case

and distinguished it. The Court said that the plaintiffs in

the Burgess case were presumed to be required to amend

original returns and therefore a full recovery was required

to put them back into their original situation. The opposite

is true in the Austin v. Loftsgaarden case where the plain-

tiffs have paid their taxes on the entire amount they have

received as recapture on foreclosure. Therefore neither the

Burgess nor Western cases are in conflict but are dis-

tinguished by the fact situation.

The history concerning the Second Circuit's addressing

the tax benefit question is described in Salcer v. Envicon

Equities Corp., 744 F.2d 935 (2d Cir. 1984) at 939:

“We have never addressed a question of whether in

an action alleging fraud with the respect to a tax shel-

ter investment, the plaintiffs recovery must be reduced

by tax benefits received.”

14

We find that two years earlier in the case relied upon by

Petitioners, Western Fed. Corp. v. Davis, 553 F. Supp. 818

(1982), the following:

“While the statute mentions only ‘income’ as a credit

against the amount paid, courts have held that eco-

nomic benefits such as tax deductions must be taken

into account in determining what must be restored.

Austin v. Loftsgaarden, 675 F.2d 168, 181-83 (8th

Cir. 1982). See also Dupuy v. Dupuy, 551 F.2d 1005

(Sth Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312,

54 L.Ed.2d 197 (1977); Smith v. Bader, 83 F.R.D.

437 (S.D.NY. 1979); Bridgen v. Scott, 456 F.Supp.

1048 (S.D.Tex. 1978).”

The 1979 case of Smith v. Bader, 83 F.R.D. 437 (S.D.

N. Y. 1979):

“The plaintiffs’ investments in other partnerships and

their investments in other tax shelters may shed light

on their sophistication as investors. Similarly, knowl-

edge of plaintiffs’ income tax rate and the net value

of their investment in the partnership, along with other

information, may be needed to calculate any tax beie-

fits which may mitigate damages. See Dupuy v. Dupuy,

551 F.2d 1005 (5th Cir. 1977), cert. denied, 434 U.S.

911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977); Bridgen v.

Scott, 456 F.Supp. 1048, 1062 (S.D.Tex. 1978); Hou-

lihan v. Anderson-Stokes, Inc., 78 F.R.D. 232, 234

n.1 (D.D.C. 1978).”

“Accordingly, plaintiffs are to produce their tax re-

turns for defendants’ inspection within ten (10) days.”

The above cases are more recent than the relatively early

F.R.D. cases cited by Petitioners in the Second Circuit,

Cooper v. Hallgarten & Co., 34 F.R.D. 484, and Wiesen-

15

berger v. W. E. Hutton & Co., 35 F.R.D. 556, 557 (S.D.

N.Y. 1964).

In Bridgen v. Scott, 456 F. Supp. 1048 (S.D.Tex. 1978),

the Court said:

“Recision calls for cancellation of the bargain, and the

return of the parties to the status quo ante; where this

is impossible because of the disposal or retirement of

the stock, . . . what restitutional damages are to be

awarded must depend upon the facts of the particu-

lar case.”

“In Garnatz v. Stifel, Nicolaus & Co., Inc., supra, at

1360, the Eighth Circuit said that the court’s ‘. . .

function is to fashion the remedy best suited to the

harm.’ The trial court in calculating damages not only

may, but should, look to particular factors, unique in

each case, in reaching that determination.”

“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’ posi-

tion that the tax consequences of this transaction

should be ignored is simply not realistic and is tanta-

mount to requesting this Court and the jury to try this

case blindfolded.”

The Western Fed. Corp. v. Erickson case (supra) can be

seen, then, to approve and support Austin v. Loftsgaarden,

but the Court simply found that the facts were different:

page 820:

“The amounts claimed as a deduction and the amounts

later reported as income will wash out and the -net

tax benefit will be nothing. In this case, the economic

_ benefit by way of a tax deduction, therefore, is illu-

sory.

“16

Salcer v. Envicon Equities Corp. (supra), is not in con-

flict with Western Fed. Corp. v. Erickson. It simply found

the facts to be similar to the Austin v. Loftsgaarden in

that the benefits by way of tax deduction would not be

washed out and would not be “illusory”.

“To the extent that plaintiffs invested in a tax shelter,

all benefits they received from their investment, in-

cluding tax benefits, would have to be deducted in cal-

culating the rescissionary damages, if any, to which

they would be entitled.”

“The contention that the tax benefit doctrine applies

to this case suffers from some basic misconceptions.

It fails to distinguish between actual rescission, which

is impossible in this case because of the forced sale of

the project, and rescissionary damages, which are not

the same as rescission and may be awarded when ac-

tual rescission is unavailable.”

“In short, the ‘tax benefit doctrine’ does not dictate

the district court’s decision but depends for its appli-

cability upon the substance of that decision. To hold

as the government urges would put the cart before the

horse.”

As to the collateral source argument, it may appear that,

on first blush, Western Fed. Corp. v. Ericksen (supra) is in

conflict with Salcer v. Envicon Equities Corp. (supra) in

the Federal Corp. case at P. 821:

“Rescission is an equitable remedy to return parties to

their prior positions and to work fairness to them. It

was not the defendants who gave the tax benefits to

the plaintiffs. It was the Government. If the defendants

were to be given a credit for the value of the use of the

money, that credit would reduce the amount of in-

come that the Government would recapture under the

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tax benefit rule. In effect, the reduction in the amount

that the defendants would have to return would only

be at the Government’s expense.”

Whereas in Salcer v. Envicon Equities Corp (supra), at

p. 941:

“The essence of the collateral source rule is the inde-

pendence of the transaction giving rise to the collateral

source, such as the insurance policy. Here, in con-

trast, the tax benefits, although paid by the govern-

ment, emanate directly from the tax shelter sought

by the plaintiffs and provided by defendarts, without

which plaintiffs could not have realized any tax bene-

fits. Benefits resulting directly from a transaction

under attack must be credited toward the damage

award.

“The fact that the tax benefits were paid by the gov-

ernment rather than by the defendants does not lessen

the defendants’ role in securing them. To hold other-

wise would be to confer an undeserved windfall upon

the plaintiffs.”

A closer examination would reveal that the arguments

are mutually consistent. In the Western Fed. Corp. case,

the Court found that there had been no recapture and that

therefore there would be a wash out and the plaintiffs would

not have already paid taxes on the recapture. Therefore the

rule in that case and in that situation is consistent with

Salcer v. Envicon Equities Corp., and with Austin v. Lofts-

gaarden.

Burgess v. Premier Corp. (supra), presented a fraudulent

tax shelter situation affecting value. Neither Burgess nor

Western Fed. involved a factual situation where it had been

stipulated that a complete recapture, audit, and closed re-

turn had occurred.

18

The Second Circuit decision, Salcer v. Envicon Equities

Corp., is in accord wtih the instant case and relied upon by

the Eighth Circuit. There is no conflict between these two

Circuits.

The Austin v. Loftsgaarden decision applies only to cases

in which tax shelter is a substantial factor in connection

with investor goals. Out of $157,500.00 invested, all but

$14,473.00 has been recovered after recapture (including

$13,339.00 interest). The investment was a lawful one and

the I.R.S. has audited all returns and they are closed. Ap-

pendix A-22.

Finally, the Petitioners were certainly made whole by

reason of the doubling of the award.

CONCLUSION

For the foregoing reasons, a writ of certiorari should be

denied.

Respectfully submitted,

/s/ B. J. Lolisgaarden

2540 No. Cleveland Avenue

St. Paul, Minnesota 55113

(612) 636-3743

Pro Se