# Opposition Brief — Randall v. Loftsgaarden

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1986
- **Citation:** 478 U.S. 647

## Text

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 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0440%3A03. Public record. Not legal advice.