Randall v. Loftsgaarden

LOCATION:Circuit Court of Jefferson County

DOCKET NO.: 85-519
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 478 US 647 (1986)
ARGUED: Apr 02, 1986
DECIDED: Jul 02, 1986

John M. Friedman, Jr. – on behalf of the Respondents
Lawrence G. Wallace – for United States and the SEC, as amici curiae in support of Petitioners
Robert A. Brunig – on behalf of the Petitioners

Facts of the case


Audio Transcription for Oral Argument – April 02, 1986 in Randall v. Loftsgaarden

Warren E. Burger:

We’ll hear arguments next in Randall against Loftsgaarden.

Mr. Brunig, I think you may proceed when you are ready.

Robert A. Brunig:

Mr. Chief Justice, and may it please the Court:

This case presents the issue of whether economic benefits if any which flow from the tax deductions available to a defrauded limited partner are to be deducted from his recovery under the federal securities laws.

The case involves two specific questions: do what the Eighth Circuit characterizes as tax benefits constitute income received, as that term is used in Section 12(2) of the Securities Act of 1933; and secondly, does the actual damage limitation of Section 28 of the Securities Exchange Act of 1934 mandate such deduction.

We would argue that the answer to all of those questions is no.

I’d like to speak about this briefly in its factual context.

The petitioners here bought limited partnership associates in Alotel Associates.

When they bought it, they bought it based on an offering memorandum.

The offering memorandum projected losses for tax purposes in 1973 through 1975 which ranged from slightly above $20,000 to $476, and thereafter taxable income.

The taxable income for the entire period through 1991 was estimated to be $96,000, and that these people would be required to pay taxes of over $52,000 during that period.

Instead, they got something else.

They got certain tax deductions which led to lesser tax payments in the amounts ranging from $29,000 to slightly more than $38,000 per unit.

The reason that they got greater tax benefits was because B. J. Loftsgaarden, the general partner, created greater losses, either operating losses or greater deductions for other items that were involved, and those were not disclosed, and those were amounts which benefited him either directly or indirectly or benefited his affiliates.

There was less income, in addition, because for example the motel could not operate as it was anticipated.

Sixty of 159 rooms were not able to be occupied whenever it rained because Mr. Loftsgarden’s wholly owned corporation, 2361 Building Corporation, had built a building that leaked through the walls.

He of course did not sue himself or the architects, which was a firm of which he was a 30 percent stockholder.

Now, to take that along, we look at that in the statutory context, and this is a question of statutory construction.

The first question to be looked at is under Section 12(2) of the Securities Act of 1933, which provides that any person in a similar circumstance may recover the consideration paid for the security, with interest thereon, less the amount of any income received thereon, upon the tender of such security, and it offers an alternative remedy for those who have sold their securities, that is, damages.

The Eighth Circuit at a number of points characterized this under Section 12(2) as a damage case.

It is not, as the Eighth Circuit held in Austin One, a damage case.

It is an actual rescission case.

There was a tender, and in fact the formula applies: consideration paid, together with interest, less income received.

The Eighth Circuit held that what is called tax benefits are not a reduction in consideration paid, and that’s logical sense.

If in fact a person bought gasoline for his or her automobile and used it for business purposes, and the price was $10, there would be no reduction in the consideration paid, just as here there was no reduction in the consideration paid.

Each partnership unit had the consideration of $35,000.

Respondents asked the Court, despite the lack of a counter-petition, to review that holding.

It should not, both because it’s not logical and because it’s not appropriately before the Court.

So, the case then goes to, do in fact the reductions in the taxes paid by these individual petitioners constitute income received.

These tax benefits, as they are called, are not such income received.

Sandra Day O’Connor:

Is it possible, Mr. Brunig, that the tax benefit features of a particular investment might be part of a bargained for exchange, or part of what caused the investors to make the investment in the first instance?

Robert A. Brunig:

First of all, the short answer is yes.

Every investment involves tax consequences, whether it be one which is characterized as an artificial deduction, or any other deduction.

Every investment, as we know, has tax consequences and the Internal Revenue Code imposes those tax consequences.

Sandra Day O’Connor:

Well, can they have a market value in the mind of the investor such as would affect the damages recoverable in the event such becomes necessary?

Robert A. Brunig:

Well, every investor, including these, looked on this as an opportunity to recover a profit from the investment and to have certain tax consequences flow from that investment.

That’s true of every investment.

But to look to the benefit of the bargain, respondents would have the Court look only at the income received aspects and say, well, there were tax benefits which flowed from it.

The actual bargain is one which would have provided $96,000 in taxable income over a period of time, plus calculable appreciation.

If we are to look at this as a benefit of the bargain case, we should be allowed to recover the entire benefit of our bargain.

At the time of the investment, that projected stream of income had a valid… and we are not being allowed to recover any of that, and if we were allowed to we would be more than happy to go back and sue for the benefit of the bargain because we’d get much more.

Sandra Day O’Connor:

Well, in this case I guess the… your clients brought the action under both Section 10(b) and 12(2)?

Robert A. Brunig:

That’s correct, as well as–

Sandra Day O’Connor:

And 12(2) provides just for rescission?

Robert A. Brunig:

–In the case of these investors it provides only for rescission.

If they had in fact sold the securities, they might get damages but this provides only for rescission, that’s correct.

Sandra Day O’Connor:

Does 10(b) provide a different measure of damages?

Robert A. Brunig:

10(b) has no expressed statutory remedy.

It has a limitation on a damage remedy provided by Section 28(a) which says you are limited to actual damages.

That term itself is not described, although this Court in opinion prior to the adoption of the Securities Act of 1933 and the Exchange Act of 1934 had considered cases in which actual damages were involved, the L. P. Larson case, for example, and there the Court refused to consider the tax consequences under actual damages.

It must be presumed that Congress was aware of that.

Sandra Day O’Connor:

Well, when the two sections are both brought into the picture, then is it up to the plaintiff to select which measure of damages, or what do you do?

Are you limited only to rescission because you’ve combined 12(2)?

Robert A. Brunig:

The plaintiff is allowed to elect after the jury has returned a verdict, and the trial court in this case under 12(2) has made factual findings.

The litigant may choose the result most favorable to himself or herself.

William H. Rehnquist:

Both issues in… rescission and benefit of the bargain were submitted to the jury for findings of damages?

Robert A. Brunig:

No, that’s not correct.

Rescission was submitted to the trial court, as it was here, and the trial court made specific written findings of fact with regard to Section 12(2).

The 10(b)-5, the state Securities Act and the common law fraud claims were submitted to the jury.

The trial court considered the result of the answers to the special interrogatories submitted to the jury in making his own findings, but he made much more extensive findings which are part of the Petition Appendix.

Sandra Day O’Connor:

Was an election then made by the plaintiffs?

Robert A. Brunig:

What happened was, the trial court said that the result was the same, that there was $35,000 per unit plus interest available to these people.

The trial court also held that under a benefit… out of an out-of-pocket measure of damages, it would also obtain the same result because in an out-of-pocket measure it would have the price paid, less the value of the security at the date of the discovery of the fraud.

The trial court held that as of the date of the discovery of the fraud the securities were worthless, and because they were worthless you get the same amount back, that is $35,000 per unit.

In any event, when we talk about income received, the respondent’s expert at the time of the retrial testified that these tax benefits were in fact not income.

The Internal Revenue Code, both at the time of the adoption of the Securities Act of ’33 and the Exchange Act of ’34 would not have considered what are characterized as tax benefits to be income received.

This Court, in United Housing Foundation, considered what we have here, that is, tax deductions which are available to a person and which may create a benefit because of other income which is had, as not being income or profit when locking at the definition of a security as it exists in Section 2 of the Securities Act of 1933, and said it was not income.

In sum, this is not income received.

Now, to look at the analysis which the respondents would have the Court adopt, they would say that you look first to Section 10(b) and Rule 10(b)-5, and the limitation imposed by Section 28(a) of the Securities Exchange Act of 1934 which limits recovery to actual damages.

And they say, that must mean economic effect.

Then, they would have the Court construe the Securities Exchange Act in pari materia with the Securities Act of 1933, and say, because the standard under the ’33 Act is negligence, and scienter is required under the ’34 Act, you can’t get a greater remedy.

We believe that that analysis is reversed, and it should go to the express remedy created by Congress in attempting to determine what Congress intended as the measure of damages.

Clearly, the legislative history says that the person is to get his or her money back, to recover his or her purchase price.

There is no suggestion that tax benefits which are created only by investors’ other income, there are no tax benefits but for other income.

One of the problems that will be created in the future will be one that is demonstrated in Freschi versus Grand Coal Venture.

What happens if the individual investor determines that the deductions which are shown on the K-1 do not appear to be appropriate, and doesn’t take the deduction on his or her individual income tax return?

Is he then to be faced with question that he has failed to mitigate his damages by taking deductions which he believed to be fraudulent?

That will be the issue to arise.

We believe that Section 28(a) does not impose this kind of question.

What Section 28(a) does is, it says that you can’t get identical remedies under state and federal law and have two recoveries for those, and double up your recovery.

It says that you cannot under the Securities Exchange Act obtain punitive damages.

What we have here is a situation in which a promoter claims that he should be allowed to use the federal treasury to support his fraud, and to reduce his damages.

As this Court has repeatedly said, the intent of the federal securities laws is to protect the investor, and to deter fraud by a promoter.

That is based on the legislative history of the Act including President Roosevelt’s remarks.

In any event, if people are allowed to do this, the more money that they bleed from the limited partnership assets, the greater the tax deductions available to the limited partners and the less money the promoter will be required to pay to the defrauded investor.

Warren E. Burger:

Mr. Wallace.

Lawrence G. Wallace:

Mr. Chief Justice, and may it please the Court:

Tax incentives are provided by Congress to stimulate certain kinds of investment or economic activity, not to subsidize securities fraud.

That is basic reason why we submit that the proper approach to this case and to others like it which are in the wings, is to calculate restitutionary relief or other damage awards under the securities laws, wholly without regard to the tax effects of the securities transaction on the various participants, and to leave the further tax consequences after the fraud award to be determined between the Internal Revenue Service and each taxpayer, under principles prescribed by the Internal Revenue Code.

This approach has the twin virtues of, number one, preserving without diminution both the deterrent and the restitutionary effects of the statutory remedies against securities fraud, and, number two, allowing the tax consequences to be determined by the normal operation of the Internal Revenue Code, and under our annual tax accounting system that will provide for some recapture of revenue by the Treasury by means of the tax benefit rule or other mechanisms, and it will further assure that any remaining tax benefits, after it has all been sorted out, will rest with the persons upon whom Congress conferred those tax benefits rather than being transferred to the perpetrators of securities frauds.

Lawrence G. Wallace:

As this Court knows from its 1983 decision in Hillsboro National Bank, it can be a complex and time consuming task to sort out the tax consequences in such situations, and the results can vary depending on other aspects of the particular taxpayer’s circumstances in the taxable years at issue.

But, that is the method that Congress and the courts have prescribed for applying the Internal Revenue Code to interrelated events that stretch out over more than one taxable year.

The fundamental error of the Court of Appeals in our view, in this case, lies in its attempt through strained interpretation of the statutory terms to improve upon the system that Congress has prescribed by creating an unwieldy amalgam of securities law and tax issues to be resolved up front in the fraud suit.

It is a bit like trying to solve an equation containing too many variables without any firm starting point in doing that, and the danger of such a contrivance is that it distorts the results ordained by each statutory scheme and thereby undermines the statutory policies of both Acts.

The fact that the Eighth Circuit here and the Second Circuit have disagreed on the details of how to create such an amalgam is, in our view, merely symptomatic of the basic error of undertaking that enterprise in the first place.

Harry A. Blackmun:

Basic error by both courts?

Lawrence G. Wallace:

By both courts, of undertaking to make an amalgamation of the securities issues and the tax issues in the first place in the fraud suit, rather than applying each statute on its own terms and pursuant to its own processes in a straightforward way, seriatim, as the tax law provides and as this Court recognized in the Hanover Shoe case is the proper approach to these cases.

We agree with the petitioner that perhaps the most egregious misinterpretation of this statute is to characterize tax benefits as income of an amount due is a right if the taxpayer has generated other income through his labor or his capital, to get the government to refrain from applying as much tax to that other income as it otherwise would apply.

But, the tax benefit is not the income itself and it is not the economic activity that generates income.

There would be no economic activity if the only income people had was tax benefits.

And so, we believe that that is the fundamental error, rather than of the detailed differences in analysis between the two courts.

If there are no further questions–

Warren E. Burger:

Mr. Friedman.

John M. Friedman, Jr.:

Mr. Chief Justice, and may it please the Court:

There is no question here–

Harry A. Blackmun:

Mr. Friedman, before you start, could I ask whom you represent?

John M. Friedman, Jr.:

–All the respondents, sir, Mr. Loftsgaarden and his corporation.

Harry A. Blackmun:

Mr. Loftsgaarden must be out of the picture now.

He is an old St. Paul lawyer, as I recall.

John M. Friedman, Jr.:

He is very much in the picture, sir.

Harry A. Blackmun:

Where is the juice in this case?

Is this a test case, or where is the Juice that keeps it going?

John M. Friedman, Jr.:

I’m not sure I follow you.

Harry A. Blackmun:

Well, where is the financial responsibility?

John M. Friedman, Jr.:

With Mr. Loftsgaarden exclusively, and his corporations.

Harry A. Blackmun:

Is there money in these corporations?

John M. Friedman, Jr.:

I don’t believe the… well, I don’t know the status of the corporations.

Harry A. Blackmun:

You’ve come out of New York, a large firm.

I’m just wondering who’s paying the bill.

Mr. Loftsgaarden can’t be paying the bill.

John M. Friedman, Jr.:

Mr. Loftsgaarden is not paying the bill, sir.

The investors have invested in a tax shelter.

The tax shelter promised them savings on their taxes, and returned what was promised.

Section 28 of the 1934 Act says that no person shall recover a total amount in excess of his actual damages on account of the act complained of.

All measures of damage under the 1933 Act contemplate a return as well to the status quo ante.

No punitive damages are awardable under either Act.

The courts have held this for many years.

Warren E. Burger:

Is it your position that deterrence is not one of the functions of the securities law?

John M. Friedman, Jr.:

Deterrence is a function of the securities laws, sir, yes.

Warren E. Burger:

Deterrence, by implication, embraces the idea of a penal sanction, does it not?

John M. Friedman, Jr.:

Yes, and penal sanctions are found in the securities laws, but the provisions of the securities laws to be construed by the Court in this case are compensatory in nature.

They are the civil damage remedies and no court has sanctioned an award of anything beyond such remedy in interpreting those sections.

The lower courts tried to apply that principle carefully to the the facts of this case, and examined the investment each investor made and the returns, the economic benefits, that each investor received from this investment.

The plaintiffs and the Government would have this Court ignore the returns so received by the investors, not because they were unreal, not because they lacked value, not because they were speculative and not because the petitioners failed to receive them, but because they feel as a matter of policy that making the petitioners more than whole would deter violations of the Securities Act or otherwise serve tax policy.

The difference in an award made by the lower court, taking tax benefits into account, and an award sought by the petitioners, is the difference between an award of 20,000 some odd dollars, and an award of close to $300,000, the $280,000 penalty that is sought to be enforced against the petitioners… excuse me, against the respondents… even though the petitioners are not out of pocket anything.

Now, I would propose to address–

Warren E. Burger:

In terms of congressional policy in antitrust cases, for example, you have a trebling of damages, do you not?

John M. Friedman, Jr.:

–Yes, sir.

Warren E. Burger:

And that is for deterrence, isn’t it?

John M. Friedman, Jr.:

Yes, it is.

Warren E. Burger:

There’s nothing expressed in the Securities Act about trebling the damages, is there?

John M. Friedman, Jr.:

That is correct.

There is not.

Warren E. Burger:

Well, would you suggest that this large amount would not function as a deterrent with respect to other people similarly situated?

John M. Friedman, Jr.:

I expect it may.

There is nothing in the record, or nothing I am aware of, to suggest that since Austin One was decided some four years ago, there has been an abatement of tax shelter litigation and I don’t know that enhancing the penalty here would create such an abatement or would encourage people to sue or not, or would act as a deterrent.

But as to the economic matter, it seems logical that the more penalty associated with an action, the less the action will occur, yes, sir.

I’d like to talk about the arguments raised by the Government that to follow the rule of the Eighth Circuit and Second Circuit constitutes subsidizing fraud, and I would also like to address the statutory construction argument made by Mr. Brunig earlier.

The Government and the petitioners are fond of speaking of fraud here.

The statutes to be construed do involve fraud under the ’34 Act, but the ’33 Act statute is a negligence statute.

John M. Friedman, Jr.:

In addition, Section 11 of the ’33 Act, which would govern public offerings of tax shelters is a strict liability statute.

The subsidy, so called, can best be viewed in the context, I think, of one of the petitioners, and I propose to use Dr. Austin as the example there.

Dr. Austin originally invested $35,000.

He was returned $33,000 through his tax benefits, and he stands out of pocket now $2,000.

The so-called subsidy is represented by this $33,000 contribution of the government.

The government is not subsidizing a fraud.

Sandra Day O’Connor:

Mr. Friedman, do you know to what extent, if a rescission is obtained as a result of the securities fraud litigation, that IRS could come back later on the investor, seeking a recoupment of some of the tax benefits previously taken?

John M. Friedman, Jr.:

Depending on the situation, the normal result would be that following rescission the monies received would be treated as income by the petitioners here.

However, the income would not be taxed at anything like the 100 percent rate.

Again, consider again Dr. Austin, who has already received a permanent tax benefit of $33,000.

If he would receive his $35,000 back at this time, the most the government would take would be $17,000 or so, leaving him with a$15,000 windfall on this investment, contrary to the expressed requirements of Congress as the statutes have been interpreted by the courts, that he receive compensation and be made whole, and no more.

So, the motion that the Ninth Circuit, for example, has advanced that tax benefits will be completely recaptured by the government, the government will get all its money back in some sense, is just false, an erroneous statement of tax law.

The subsidy, though, is something worth addressing because the government is not subsidizing fraud.

The government is subsidizing a motel.

The motel is built and is functioning.

I believe you can go to Rochester, Minnesota and find it functioning today.

The government has–

Harry A. Blackmun:

I know that motel.

John M. Friedman, Jr.:

–I’m not sure how to take that, but–


The motel is functioning.

Carpenters were employed, electricians, plumbers, masons, road pavers, roofers, whoever makes lumber, two by fours, in the Pacific Northwest have this factory running a little longer to help finish this motel.

This is what the government sought to bring about.

This is what was brought about by the building of this motel.

And the notion that the government is somehow entitled to any measure of damages now to get back some of that money is preposterous.

That’s exactly what the Second Circuit held.

They phrased it this way: they said, the government is not banking fraud, which was the expression used by the Ninth Circuit and by the petitioners today.

The government is banking exactly what it agreed to bank, which is a type of economic activity.

Having gotten that, I used the word “preposterous” and perhaps “disingenuous” would be a better word, the government is not entitled to get it back.

The subsidy here is not a fraud.

John M. Friedman, Jr.:

Injuries caused by fraud, Dr. Austin’s $2,000 out of pocket loss, have been restored to him.

That is what the Eighth Circuit did.

There was no subsidy of the fraud.

Now, I think the clearest way to illustrate this point, and I don’t want to beat this horse to death–

Byron R. White:

I suppose that if the fraud hadn’t taken place in the first place there wouldn’t have been any tax savings?

John M. Friedman, Jr.:

–Well, let me examine that very scenario.

Let’s suppose that at the outset in 1973 the petitioners came to Mr. Loftsgaarden and said, we wish to rescind, take back our units, and he did, and return them each for $35,000 per unit.

What would happen then?

What would happen is, the motel would have been built and all the tax benefits associated with it would have gone to the owner of the units, Mr. Loftsgaarden.

He would have received the tax benefits, not the petitioners.

An that is the same economic–

Byron R. White:

That may be so, but these people who invested, if they had… they probably wouldn’t have invested if they had known what they should have known.

John M. Friedman, Jr.:

–That’s right.

Byron R. White:

Or they may have acquired a tax benefit that was caused by the fraud.

John M. Friedman, Jr.:

Yes, it was caused by the investment, induced by the fraud, that is correct.

I don’t know–

Byron R. White:

Your clients were not entirely blameless for causing the–

John M. Friedman, Jr.:

–No, they weren’t.

But as with any investment–

Byron R. White:

–The government suffered from the tax benefit?

John M. Friedman, Jr.:

–I don’t think the government has suffered, and I think that’s a vital issue here, and I think that’s exactly what–

Byron R. White:

At least it didn’t collect these taxes from these investors.

John M. Friedman, Jr.:

–But, it encouraged–

Byron R. White:

And it may never be able to collect then from anybody?

John M. Friedman, Jr.:

–It may not, but the reason it may not is because it sought to induce a kind of economic activity that was in fact induced, and brought about.

Warren E. Burger:

Well, did the government lose anything by the fraudulent nature of the transaction that it wouldn’t have lost if the transaction had not been accompanied by–

John M. Friedman, Jr.:

Not at all, not at all, and that is what the Second Circuit meant when it said, the government is banking exactly what it agreed to bank.

All the deductions and tax credits that led to the tax savings by the investors here have been audited, and were found to be completely proper.

This is not a case where the government was cheated out of some tax revenues it otherwise might have received.

The fraud went only to the incremental investment made by each of these investors, and they have been made whole.

John M. Friedman, Jr.:

The illustration I used, which invited the Court to effect this rescission in 1973, I think shows that.

The economic position of the parties would have been, had the transaction either not occurred or been rescinded right away, is the exact economic position they find themselves in today by reason of the action of the Eighth Circuit.

Byron R. White:

–Do you think the United States, then, has a financial interest in this case at all, or is it just, they think this would be a sort of deterrent way of enforcing the securities laws?

John M. Friedman, Jr.:

Well, they do have a financial interest.

If the petitioners were awarded $300,000 instead of 20,000 some odd dollars, there would be more money to tax, and some of those tax benefits that the government gave out would come back, by no means all of them, but some would come back despite the fact that what the government sought to bring about by granting those tax benefits has occurred.

Byron R. White:

So, the United States would stand to collect some more taxes?

John M. Friedman, Jr.:

If the award was increased, yes, they would.

William H. Rehnquist:

Well, I suppose the government might have an interest in appearing as amicus before any court reviewing any sort of awards to plaintiffs, urging that the awards be increased on that basis because the government would get more tax money?

John M. Friedman, Jr.:

Well, they would have an incentive to do that, yes.

I would like to turn, if I may, to the statutory interpretation argument that Mr. Brunig has made this morning, because I think it is erroneous.

We have argued in our brief, and by no means abandoned the position, that the nature of these tax benefits is properly considered as a restoration of consideration paid for the investment by the investor.

I won’t rehash the arguments made in the brief because I want to address the income point, because I feel that if the investment is not regarded as a return of consideration, it must be treated as a form of income.

And I think as a result, compelled in part by the Court’s decision in the Norfols and Western Railway case in which the Court decided a few years ago that in determining the earnings of a railwayman killed in an accident for the purpose of awarding his wife his lost earnings, the taxes he would have to pay must be deducted like any other costs of his former life before the net amount was determined.

And it seems to me that if the Court is recognizing, as it does, that the payment of a tax liability is a cost to be subtracted from income determining net amount, that it follows that relief from a tax liability is properly regarded as income, at least in an economic sense.

And I don’t want to suggest it’s taxable income, but in an economic sense the status of person both before and after he invested in a tax shelter is different.

Tax benefits enhance a person’s wealth by reducing his taxes, and in that sense constitute economic income regardless of whether it constitutes taxable income.

Indeed, Section 61 of the Internal Revenue Code, which I concede is not strictly applicable here, has underlying it an economic principle.

It says that the forgiveness or release of indebtedness constitutes income.

William H. Rehnquist:

What may constitute income for purposes of the internal Revenue Code can be quite different from what we think of normally as income, can it not?

John M. Friedman, Jr.:


Yes, it can.

I think people normally think of increments to one’s wealth as income.

The man on the street may not–

Warren E. Burger:

Do you regard that as income too?

John M. Friedman, Jr.:


Warren E. Burger:

Do you regard capital gains the same as income?

John M. Friedman, Jr.:

They are a form of income, yes, sir.

They’re not the same as earned income, obviously, but–

Warren E. Burger:

They’re taxes somewhat differently, aren’t they?

John M. Friedman, Jr.:

–And they are taxed differently, certainly.

John M. Friedman, Jr.:

But from an economic standpoint they can be a return on investment and a form of income in that sense.

Now, I think if we stand back from this statute, and I’m referring here to Section 12, the purpose of this statute, and the Government appears to agree with this as well as the petitioners, the purpose is to effect a rescission and restitution, to return the parties to the status quo ante.

I think an interpretation of income which closes its eyes to the economic necessities in achieving that end is a misinterpretation of the word “income” in the statute, and unless the word “income” is interpreted to include all the economic benefits that an investor receives from his investment, there will be misconstruction and the parties will not be returned to the status quo.

That is an important fact in the statutory interpretation here.

The purpose of the statute is to return the parties to the status quo ante.

That can’t be done unless the economic benefits received from the investment by the investors are taken into account.

The Court, I believe, should not close its eyes to that principle.

I think it’s easy to lose sight of the facts of this case before the Court.

It is essentially a simply case.

An investment was made benefits were returned from the investment.

The plaintiffs have been made whole.

They have the same amount of money in their pockets they had before they got in to this investment.

No policy requires making them more than whole in the face of statutes whose purpose and whose limitation is to avoid actual damages or compensation on account of the acts complained of.

Thank you.

Warren E. Burger:

You have five minutes remaining, Mr. Brunig.

Robert A. Brunig:

Thank you, and may it please the Court:

Counsel would say, we would like to return the parties to the status quo ante.

Counsel does not suggest that Mr. Loftsgaarden would be returned to the status quo ante and required to disgorge the $70,000 which he paid to his wholly owned corporation as rent during 1973.

He does not suggest that he be required to pay the in excess of $100,000 which the partnership paid over and above what was disclosed as the cost of constructing a motel.

He does not suggest that Mr. Loftsgaarden pay the $23,100 mortgage commitment fee which he paid to Property Development Research Company, his 100 percent owned corporation, or the $23,100 he paid to Lyman Colt, a member of the board of directors of Alotel Associates.

He does not suggest that Mr. Colt repay the undisclosed $25,000 real estate commission that he was paid.

He does not suggest–

Byron R. White:

Yes, but what about the relationships between the investors and him?

Robert A. Brunig:

–I’m sorry, I don’t understand the question.

Byron R. White:

Well, are they being… are their relationships being returned to what they were before, the investors’ relationship to Mr…. what’s his name?

Robert A. Brunig:



Robert A. Brunig:

Mr. Loftsgaarden got all the money to which he was entitled, plus a great deal more.

Byron R. White:

Well, I know, but aren’t these investors being returned to their pre-deal commission?

Robert A. Brunig:

Had they had–

Byron R. White:

Yes or no.

Robert A. Brunig:

–They are not being returned under the present status–

Byron R. White:

In what respect?

Robert A. Brunig:

–Because as was the testimony of petitioner Newmann, for example, he was looking at a variety of very similar deals, all of which would have provided him with similar tax deductions, similar tax benefits.

He cannot get that with he several thousand dollars which he’s being awarded under the Eight Circuit’s holding, because he would have had both the tax deductions and the real estate investments.

Byron R. White:

And the profit?

Robert A. Brunig:

And the ultimate profit, the capital gain on the apartment buildings in which he had invested previously, and would have invested at this time.

What Mr. Loftsgaarden is saying is, the Treasury should pay out the $280,000 which he wishes to keep and would otherwise have had to pay back.

Clearly, if these people had not had other income from other sources, these would have been no tax benefits and he would not have been able to deduct one penny from the recovery, even under the Eighth or Second Circuit holdings.

But, there is no way to give these people their lost investment opportunity back again.

They were the people at risk.

They took certain risks, and Mr. Loftsgaarden imposed unilaterally other risks upon them.

Byron R. White:

Did they get some benefit for the use of the money, for the money that was returned to them?

Robert A. Brunig:

They were allowed to take certain deductions, but they got nothing other than that.

Part of the deductions were obtained in a different way.

It cost real dollars.

These people had to make loans to the partnership which they were not allowed to recover by the district court, because the district court held that they had learned of the fraud before making the loan, therefore there was no reliance and therefore no recovery.

So, these people put in money to be used for operating capital which was lost because of the fraud, and that is not and will never be returned, even if we should succeed, and certiorari be used to reverse the decision of the Eighth Circuit.

So, that money is lost.

These people were required to make those loans to get these deductions.

It was real money.

It was not artificial deductions.

To answer the earlier question, would there be some recoupment by the government, certainly the mitigation provisions under Sections 1311 to 1314 allow the government to recoup some of that money, because when the status is changed by a subsequent judicial decision as we’ve noted in the brief, the government has a mechanism available in addition to the tax benefit.

If there are no further questions–

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.