Supreme Court of the United States
RANDALL et al.
LOFTSGAARDEN et al.
Decided July 2, 1986
Justice O’Connor, For the Court
|Topic: Economic Activity*||Court vote: 8–1|
Click any Justice for detailJoining O'Connor opinion: Justice BLACKMUN Chief Justice BURGER Justice MARSHALL Justice POWELL Justice REHNQUIST Justice STEVENS Justice WHITE
|Citation: 478 U.S. 647||Docket: 85–519||Audio: Listen to this case's oral arguments at Oyez|
* As categorized by the Washington University Law Supreme Court Database
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JUSTICE O'CONNOR delivered the opinion of the Court.
The question presented is whether the recovery available to a defrauded tax shelter investor, entitled under § 12(2) of the Securities Act of 1933 or § 10(b) of the Securities Exchange Act of 1934 to rescind the fraudulent transaction or obtain rescissory damages, must be reduced by any tax benefits the investor has received from the tax shelter investment.
In 1973, petitioners purchased interests in Alotel Associates (Associates), a limited partnership organized by respondent B. J. Loftsgaarden to build and operate a motel in Rochester, Minnesota. Loftsgaarden was the president and sole shareholder of respondent Alotel, Inc. (Alotel), which, together with Loftsgaarden, was to be a general partner in the venture.
Loftsgaarden marketed this $3.5 million project as a "tax shelter," which would result in " significantly greater returns for persons in relatively high income tax brackets.'" Austin v. Loftsgaarden, 675 F.2d 168, 173 (CA8 1982) ( Austin I ). As a partnership, Associates would not be taxed as an entity. Rather, its taxable income and losses would pass through to the limited partners, who would then be entitled to claim their individual shares of the partnership's deductible losses to the extent of their adjusted basis in their partnership interests. 26 U.S.C. § 704(d). Especially attractive from the high-income investor's perspective was the fact that,
in a real estate investment such as the one contemplated by Loftsgaarden, the limited partner's basis is not restricted to the amount of his actual investment (the amount 'at risk'); rather, it may be increased by the partner's proportional share of any nonrecourse loans made to the partnership.
675 F.2d at 173. See 26 U.S.C. § 465(c)(3)(D). Consequently, the individual limited partner may be able to claim deductible partnership losses in amounts greatly in excess of the funds invested, and offset those losses against other income.
The initial offering memorandum indicated that Associates would employ financing techniques designed to provide large and immediate tax savings to the limited partners: a nonrecourse loan would finance the bulk of the project, and rapid depreciation methods would be used to throw off large initial losses. Nonetheless, the initial offering was unsuccessful, and Loftsgaarden revised the plan and the offering memorandum to propose that Associates would rent land instead of purchasing it, thereby incurring another deductible expense. Petitioners subscribed to the second offering, investing from $35,000 to $52,500 each. Associates soon began to experience financial difficulties, and in February, 1975, Loftsgaarden asked the limited partners to make additional loans to Associates; they complied, but initiated an investigation into the partnership. Associates eventually defaulted on its obligations, and, in 1978, the motel was foreclosed on by its creditors.
Petitioners brought suit in the District Court in 1976, alleging securities fraud and raising federal claims under § 12(2) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U.S.C. § 771(2), § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 CFR 240. 10b-5 (1985), as well as pendent state law claims. The jury found that respondents had knowingly made material misrepresentations and omissions in the revised offering memorandum, and that petitioners had reasonably relied on these material misstatements, which caused their damages. Among other misstatements, respondents had mischaracterized the financing available, the terms of the land lease, and the manner and extent of their compensation for services rendered. These findings made respondents liable under § 10(b), Rule 10b-5, and state law. The District Court also accepted the jury's advisory verdict that respondents were liable under § 12(2) for knowingly making material misrepresentations and omissions in the offering memorandum which induced their purchases. App. to Pet. for Cert. E-1.
Finding that petitioners' investments were worthless by the time they discovered the fraud in 1975, the District Court held that the remedy of rescission was proper under § 12(2), which provides that an investor harmed by prospectus fraud may sue
to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
15 U.S.C. § 771(2). Rescission was permissible, the court ruled, notwithstanding that petitioners had not made a tender of their securities to respondents until shortly before trial. App. to Pet. for Cert. E-15. Accordingly, the District Court entered judgment for petitioners in the amount of the consideration paid for the limited partnership units, together with prejudgment interest; it also noted that each of the counts found by the jury would independently support respondents' liability, but that "each plaintiff is entitled only to a single recovery." Id. at E-16. The District Court rejected respondents' contention that petitioners' recovery should be offset by tax benefits received, concluding that,
[a]bsent [respondents'] fraud, which induced their purchases, [petitioners] would probably have made other investments which produced temporary tax savings, but without the total loss of their investment.
Id. at F-9 F-10.
A panel of the Court of Appeals for the Eighth Circuit sustained respondents' liability under § 12(2) and § 10(b), but reversed the rescissory award and remanded for a new trial on that issue. The panel rejected respondents' claim that petitioners were not entitled to rescission under § 12(2) because they had made no tender of their partnership interests until shortly before trial, 675 F.2d at 179, agreeing with the District Court's "decision to apply what was essentially a rescissory measure of damages in this case." Id. at 181. The panel held, however, that the District Court had erred in refusing to reduce "the damage award" by an amount equal to any tax benefits received by petitioners "on account of the investment." Ibid.
In the panel's view, an "actual damages principle," applicable both to § 12(2) and § 10(b), required that an award of rescission or of rescissory damages be " reduced by any value received as a result of the fraudulent transaction.'" Id. at 181 (quoting Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357, 1361 (CA8 1977), cert. denied, 435 U S 951 (1978)). The panel observed that the benefits anticipated from a successful real estate tax shelter typically include tax savings to the limited partner in the early years, followed by income in later years, and reasoned that,
unlike a corporate shareholder,... even if the enterprise fails to become profitable, the limited partner clearly may have something of value because of the investment's unique tax treatment.
675 F.2d at 182. In light of "the value of the tax deductions generated by such an investment," the panel held that
the strictly compensatory nature of damages awardable in private securities fraud actions requires that such value be taken into account in determining whether and to what extent damages were inflicted upon plaintiffs.
Id. at 183. Finally, the panel rejected petitioners' objection that, "because there are tax consequences to any investment one makes, evidence of those consequences will now figure in every securities fraud case," and asserted that its holding was limited to "cases involving investments that are expressly marketed and sold as tax shelters." Ibid.
On remand, the District Court held a bench trial on the issue of tax benefits, and calculated each petitioner's damages as the purchase price of his partnership interest plus simple interest, minus net tax benefits. App. to Pet. for Cert. C-5. Both petitioners and respondents appealed from the District Court's judgment, and, after a second panel ruled on various subsidiary issues, the Court of Appeals reconsidered the case en banc. Austin v. Loftsgaarden, 768 F.2d 949 (CA8 1985) ( Austin II ).
Relying in part on the law of the case, and noting that the Second Circuit had reached a similar result in Salcer v. Envicon Equities Corp., 744 F.2d 935 (1984), vacated and remanded, post, p. 1015, the Court of Appeals adhered to the Austin I panel's holding that an award of rescission or of rescissory damages to a defrauded tax shelter investor should be reduced by any tax benefits actually received. This offset moreover, was required whether the award stemmed from liability under § 10(b) or § 12(2). 768 F.2d at 953-954. As to § 10(b), the Court of Appeals relied on § 28(a) of the 1934 Act, which provides that
no person permitted to maintain a suit for damages under the provisions of this chapter shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages on account of the act complained of.
15 U.S.C. § 78bb(a). As to § 12(2), the court acknowledged that "the words actual damages' do not appear in the 1933 Act," but suggested that the rescission remedy provided by § 12(2) had been, and should be, construed as
"substantially equivalent to the damages permitted under section 28(a). Cf. Affiliated Ute Citizens v. United States, 406 U. S. 128, 406 U. S. 155 (1972).... The goal of rescission under section 12(2) is to return the parties to the status quo ante, "and hence a plaintiff can recover no more than his or her net economic loss,' i.e., actual damages.""
768 F.2d at 954 (quoting Salcer, supra, at 940). Although the Court of Appeals recognized that "tax benefits received" are not "a form of income in a strict accounting sense," 768 F.2d at 955, it nonetheless concluded, in light of its interpretation of § 28(a) and of the purposes of the rescission remedy, that tax benefits are "income received" within the meaning of § 12(2). 768 F.2d at 954-955.
The Court of Appeals then proceeded to engage in a detailed analysis of the manner in which petitioners' rescissory damages should be determined. The court ruled that prejudgment interest should not have been based on the total consideration paid by each petitioner, but rather on the amount by which each was " out-of-pocket' during each year of the investment." Id. at 958. The court then determined that, under its theory, the tax consequences flowing from petitioners' recovery of damages, as well as the tax benefits themselves, should be taken into account in determining damages. Accordingly, it doubled the total damages award, including prejudgment interest, to reflect the fact that each petitioner was in the 50% income tax bracket. Id. at 960-961. The combined effect of the Austin II court's several rulings was this: under the rescissory approach originally employed by the District Court, petitioners would have been entitled to total recoveries ranging from $64,610 to $96,385, App. to Pet. for Cert. B-l B-2; under the Court of Appeals' final ruling, petitioners could recover only amounts ranging from $506 to $7,666. 768 F.2d at 961.
Two judges dissented from the Court of Appeals' adherence to the panel's holding in Austin I. In their view, tax benefits could not plausibly be viewed as "income received" within the meaning of § 12(2), and the effect of allowing a tax benefit offset was to provide "a windfall to the defendant -the fraudulent party." 768 F.2d at 963 (Lay, C.J., dissenting). We granted certiorari because of the question's importance to the administration of the federal tax and securities laws, and because the Courts of Appeals are divided in their treatment of tax benefits for purposes of calculating damages in federal securities fraud litigation. 474 U.S. 978 (1985). See Burgess v. Premier Corp., 727 F.2d 826, 838 (CA9 1984) (refusing to reduce damages by tax benefits received in an action under § 10(b)). We now reverse.
Section 12(2) specifies the conduct that gives rise to liability for prospectus fraud and expressly creates a private right of action in favor of the defrauded investor, who
may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
15 U.S.C. § 771(2). Thus, § 12(2) prescribes the remedy of rescission except where the plaintiff no longer owns the security. See Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1035 (CA2 1979). Even in the latter situation, we may assume that a rescissory measure of damages will be employed; the plaintiff is entitled to a return of the consideration paid, reduced by the amount realized when he sold the security and by any "income received" on the security. See H.R.Rep. No. 85, 73d Cong., 1st Sess., 9 (1933) (under § 12, the buyer can "sue for recovery of his purchase price, or for damages not exceeding such price"); L. Loss, Fundamentals of Securities Regulation 1020 (1983) (hereinafter Loss) ("[w]hen the plaintiff in § 12 no longer owns the security, damages are to be measured so as to result in the substantial equivalent of rescission").
Petitioners contend that § 12(2)'s "income received" language clearly excludes tax benefits received pursuant to a tax shelter investment, because tax benefits are not "a form of income in a strict accounting sense," Austin II, 768 F.2d at 955 (footnote omitted), and are not taxed as such. Accordingly, petitioners argue that tax benefits cannot offset a rescissory award under § 12(2).
Here, as in other contexts, the starting point in construing a statute is the language of the statute itself. E.g., Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 430 U. S. 477 (1977). Moreover,
if the language of a provision of the securities laws is sufficiently clear in its context and not at odds with the legislative history, it is unnecessary to examine the additional considerations of 'policy'... that may have influenced the lawmakers in their formulation of the statute.
Aaron v. SEC, 446 U. S. 680, 446 U. S. 695 (1980) (quoting Ernst & Ernst v. Hochfelder, 425 U. S. 185, 425 U. S. 214, n. 33 (1976)). Section 12(2), we think, speaks with the clarity necessary to invoke this "plain language" canon: § 12(2)'s offset for "income received" on the security does not encompass the tax benefits received by defrauded investors by virtue of their ownership of the security, because such benefits cannot, under any reasonable definition, be termed "income."
The tax benefits attributable to ownership of a security initially take the form of tax deductions or tax credits. These have no value in themselves; the economic benefit to the investor -the true "tax benefit" -arises because the investor may offset tax deductions against income received from other sources or use tax credits to reduce the taxes otherwise payable on account of such income. Unlike payments in cash or property received by virtue of ownership of a security -such as distributions or dividends on stock, interest on bonds, or a limited partner's distributive share of the partnership's capital gains or profits -the "receipt" of tax deductions or credits is not itself a taxable event, for the investor has received no money or other "income" within the meaning of the Internal Revenue Code. See 26 U.S.C. § 61. Thus, we would require compelling evidence before imputing to Congress an intent to describe the tax benefits an investor derives from tax deductions or credits attributable to ownership of a security as "income received thereon."
This Court's decision in United Housing Foundation, Inc. v. Forman, 421 U. S. 837 (1975), lends additional support to our conclusion that the economic value of tax deductions and tax credits in the hands of a particular investor is not "income received" on a security for purposes of § 12(2). In Forman, the Court rejected a claim that shares in certain housing projects must be deemed to be "securities" because of "the deductibility for tax purposes of the portion of the monthly rental charge applied to interest on the mortgage," which was said to constitute "an expectation of income.'" Id. at 421 U. S. 854 -855. To the contrary, the Court found "no basis in law for the view that the payment of interest, with its consequent deductibility for tax purposes, constitutes income or profits." Id. at 421 U. S. 855. In this case, we reject the analogous suggestion that the tax deductions petitioners were entitled to take by virtue of their partnership interests "constitut[e] income or profits." Ibid.
Respondents have produced no specific evidence from the sparse legislative history of § 12(2) to establish that Congress intended tax benefits to be treated as "income received." Instead, respondents urge that we look to the nature of the equitable remedy of rescission, which they say is exclusively "an effort to restore the status quo ante. " Brief for Respondents 27. Under this interpretation of rescission, respondents maintain,
'any person demanding the rescission of a contract to which he is a party must restore or offer to restore to the other party whatever he may have received under the contract in the way of money, property, or other consideration or benefit.'
Ibid. (quoting 2 H. Black, Rescission of Contracts and Cancellation of Written Instruments § 617, p. 1417 (1916)). Petitioners' tax benefits, respondents argue, constitute such "consideration or benefit." Generalities such as these -which come to us unsupported by any instance in which a common law court treated tax benefits as consideration or property that must be returned or offset against the plaintiff's recovery in rescission -fall far short of the showing required to overcome the plain language of § 12(2). Moreover, even at common law, it is quite likely that tax benefits would be ignored for purposes of a rescissory remedy. Under the "direct product" rule, the party seeking rescission was required to credit the party against whom rescission was sought only with gains that were the "direct product" of the property the plaintiff had acquired under the transaction to be rescinded:
The phrase 'direct product' means that which is derived from the ownership or possession of the property without the intervention of an independent transaction by the possessor.
Restatement of Restitution § 157, Comment b (1937). We agree with amici, the United States and the Securities and Exchange Commission, that tax benefits, because they accrue only if the tax deductions or credits the investment throws off are combined with income generated by the investor or taxes owed on such income, would in all likelihood not have been deemed a "direct product" of the security at common law. See Brief for United States and SEC as Amici Curiae 13. Cf. Cereal Byproducts Co. v. Hall, 16 Ill.App.2d 79. 147 N.E.2d 383, aff'd, 15 Ill.2d 313, 155 N.E.2d 14 (1958) (refusing to reduce damages for an accountant's negligence in not discovering an embezzlement of plaintiff by the amount of the tax benefits plaintiff received by virtue of the theft). Respondents offer no reason to think that, in enacting § 12(2), Congress intended to curtail the investor's recovery by relaxing the limit on offsets imposed by the "direct product" rule.
Respondents' view of the purposes served by § 12(2)'s rescission remedy is likewise flawed. Certainly a restoration of the plaintiff to his position prior to the fraud is one goal that will generally be served by § 12(2), as by common law rescission or restitution. But the 1933 Act is intended to do more than ensure that defrauded investors will be compensated: the Act also
aim[s]... to prevent further exploitation of the public by the sale of unsound, fraudulent, and worthless securities through misrepresentation [and] to place adequate and true information before the investor.
S.Rep. No. 47, 73d Cong., 1st Sess., 1 (1933). See also United States v. Naftalin, 441 U. S. 768, 441 U. S. 775 -776 (1979). We may therefore infer that Congress chose a rescissory remedy when it enacted § 12(2) in order to deter prospectus fraud and encourage full disclosure, as well as to make investors whole. Indeed, by enabling the victims of prospectus fraud to demand rescission upon tender of the security, Congress shifted the risk of an intervening decline in the value of the security to defendants, whether or not that decline was actually caused by the fraud. See Thompson, The Measure of Recovery under Rule 10b-5: A Restitution Alternative to Tort Damages, 37 Vand.L.Rev. 349, 369 (1984) (hereinafter Thompson); Loss, at 1133. Thus, rescission adds an additional measure of deterrence as compared to a purely compensatory measure of damages.
We also reject, as did the Court of Appeals, 768 F.2d at 958, respondents' alternative contention that tax benefits constitute "a return of, or a reduction in, consideration.'" Brief for Respondents 29-30. There is no indication that Congress intended the word "consideration" in § 12(2) to mean anything other than what the context would suggest -the money or property given by the investor in exchange for the security. And, in view of the express offset for "income received," we think any implicit offset for a return of consideration must be confined to the clear case in which such money or property is returned to the investor. Here, the consideration given by petitioners in exchange for their partnership interests took the form of money, not tax deductions, and the fact that petitioners received tax deductions from which they were able to derive tax benefits therefore cannot constitute a return of that consideration. Accordingly, we hold that § 12(2) does not authorize an offset of tax benefits received by a defrauded investor against the investor's rescissory recovery, either as "income received" or as a return of "consideration," and that this is so whether or not the security in question is classified as a tax shelter.
We now consider whether § 28(a) should alter our conclusion that § 12(2) does not authorize a reduction in the plaintiff's recovery in the amount of tax benefits received, and whether § 28(a) requires such an offset when a rescissory measure of damages is applied to a plaintiff's § 10(b) claim. Respondents suggest that § 12(2) and § 28(a) should be construed in pari materia, arguing that the Court of Appeals correctly determined that § 28(a) stands for a broad principle that recovery under the federal securities laws is strictly limited to the defrauded investor's "actual damages," and hence that anything of economic value received by the victim of fraud as a result of the investment must be used to reduce the victim's recovery. This principle, they say, requires us to construe § 12(2)'s express offset for "income received" on the security as encompassing any tax benefits received by petitioners.
The Court of Appeals relied on Globus v. Law Research Service, Inc., 418 F.2d 1276 (CA2 1969), cert. denied, 397 U.S. 913 (1970), which read § 17(a) of the 1933 Act in pari materia with § 28(a) insofar as the latter provision is deemed to bar punitive damages. See 768 F.2d at 954. Assuming, arguendo, that Globus was correctly decided, it is clearly distinguishable, for any private right of action under § 17(a) would be an implied one, and § 17(a) makes no reference to damages, whether punitive or compensatory. See 418 F.2d at 1283-1284. By contrast, Congress addressed the matter of prospectus fraud with considerable specificity in § 12(2), which not only antedates § 28(a) but was also left untouched by Congress when it passed the 1934 Act. See Loss, at 1024. We therefore decline to read § 28(a) as mandating a limit on the rescission remedy created by Congress in the 1933 Act by enactment of § 12(2). To hold otherwise would be to effect a partial repeal of § 12(2) by implication, and " [i]t is, of course, a cardinal principle of statutory construction that repeals by implication are not favored.'" Radzanower v. Touche Ross & Co., 426 U. S. 148, 426 U. S. 154 (1976) (quoting United States v. United Continental Tuna Corp., 425 U. S. 164, 425 U. S. 168 (1976)). There is no "irreconcilable conflict" here between the two Acts, nor is this a case in which "`the later act covers the whole situation of the earlier one and is clearly intended as a substitute.'" 426 U.S. at 426 U. S. 154, quoting Posadas v. National City Bank, 296 U. S. 497, 296 U. S. 503 (1936). Cf. Herman & MacLean v. Huddleston, 459 U. S. 375, 459 U. S. 384 (1983) (adopting a "cumulative construction of the remedies under the 1933 and 1934 Acts").
The issue whether and under what circumstances rescission or a rescissory measure of damages is available under § 10(b) is an unsettled one. In Affiliated Ute Citizens v. United States, 406 U. S. 128, 406 U. S. 155 (1972), which involved violations of § 10(b) and Rule 10b-5 by a buyer of securities, this Court held that, ordinarily,
the correct measure of damages under § 28 of the Act, 15 U.S.C. § 78bb(a), is the difference between the fair value of all that the [plaintiff] received and the fair value of what he would have received had there been no fraudulent conduct.
Courts have also generally applied this "out-of-pocket" measure of damages in § 10(b) cases involving fraud by a seller of securities, see, e.g., Harris v. American Investment Co., 523 F.2d 220, 225 (CA8 1975), cert. denied, 423 U.S. 1054 (1976); Thompson, at 365. But there is authority for allowing the § 10(b) plaintiff, at least in some circumstances, to choose between
undoing the bargain (when events since the transaction have not made rescission impossible) or holding the defendant to the bargain by requiring him to pay [out-of-pocket] damages.
Loss, at 1133. See, e.g., Blackie v. Barrack, 524 F.2d 891, 909 (CA9 1975) ("While out-of-pocket loss is the ordinary standard in a 10b-5 suit, it is within the discretion of the district judge in appropriate circumstances to apply a rescissory measure."), cert. denied, 429 U.S. 816 (1976).
Respondents do not dispute that rescission or a rescissory measure of damages may sometimes be appropriate under § 10(b), nor do they dispute that, in this case, a rescissory recovery is appropriate on petitioners' § 10(b) claims as well as on their § 12(2) claims. Instead, they contend that § 28(a) strictly limits any such rescissory recovery to the plaintiff's net economic harm. We shall therefore assume, arguendo, that a rescissory recovery may sometimes be proper on a § 10(b) claim, and that this is such a case.
In enacting § 28(a), Congress did not specify what was meant by "actual damages." It is appropriate, therefore, to look to "the state of the law at the time the legislation was enacted" for guidance in defining the scope of this limitation. Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U. S. 353, 456 U. S. 378 (1982). When § 28(a) was enacted, § 12(2) stood as a conspicuous example of a rescissory remedy, and we have found that Congress did not intend that a recovery in rescission under § 12(2) be reduced by tax benefits received. Accordingly, we think § 28(a) should not be read to compel a different result where rescissory damages are obtained under § 10(b).
Even apart from the analogy furnished by § 12(2), this Court has never interpreted § 28(a) as imposing a rigid requirement that every recovery on an express or implied right of action under the 1934 Act must be limited to the net economic harm suffered by the plaintiff. To be sure, this Court has noted that "Section 28(a) of the 1934 Act... limits recovery in any private damages action brought under the 1934 Act to actual damages,'" Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 421 U. S. 734 (1975), and Affiliated Ute Citizens clearly interpreted § 28(a) as governing the measures of damages that are permissible under § 10(b). 406 U.S. at 406 U. S. 155. But the Court in Affiliated Ute Citizens also indicated that, "where the defendant received more than the seller's actual loss..., damages are the amount of the defendant's profit." Ibid. This alternative standard aims at preventing the unjust enrichment of a fraudulent buyer, and it clearly does more than simply make the plaintiff whole for the economic loss proximately caused by the buyer's fraud. Indeed, the accepted rationale underlying this alternative is simply that "[i]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them." Janigan v. Taylor, 344 F.2d 781, 786 (CA1), cert. denied, 382 U.S. 879 (1965). See also Falk v. Hoffman, 233 N.Y.199, 135 N.E. 243 (1922) (Cardozo, J.). Thus, the mere fact that the receipt of tax benefits, plus a full recovery under a rescissory measure of damages, may place a § 10(b) plaintiff in a better position than he would have been in absent the fraud does not establish that the flexible limits of § 28(a) have been exceeded.
In any case, respondents' contention that plaintiffs will receive undeserved "windfalls" absent an offset for tax benefits is greatly overstated. Even if tax benefits could properly be characterized as a windfall -which we doubt -the tax laws will serve to reduce, although not necessarily to eliminate, the extent of plaintiffs' net economic gain as compared to the status quo ante. We are told that the "tax benefit rule" will apply in cases of rescission, thus making the recovery taxable as ordinary income. See Hillsboro National Bank v. Commissioner, 460 U. S. 370 (1983); Brief for United States and SEC as Amici Curiae 25. Any residual gains to plaintiffs thus emerge more as a function of the operation of the Internal Revenue Code's complex provisions than of an unduly generous damages standard for defrauded investors.
Respondents also overlook the fact that Congress' aim in enacting the 1934 Act was not confined solely to compensating defrauded investors. Congress intended to deter fraud and manipulative practices in the securities markets, and to ensure full disclosure of information material to investment decisions. Affiliated Ute Citizens, supra, at 151; see also Herman & MacLean, 495 U.S. at 495 U. S. 386 387. This deterrent purpose is ill-served by a too rigid insistence on limiting plaintiffs to recovery of their "net economic loss." Salcer, 744 F.2d at 940. The effect of allowing a tax benefit offset would often be substantially to insulate those who commit securities frauds from any appreciable liability to defrauded investors. The resulting diminution in the incentives for tax shelter promoters to comply with the federal securities laws would seriously impair the deterrent value of private rights of action, which, we have emphasized, "provide a most effective weapon in the enforcement' of the securities laws and are a `necessary supplement to Commission action.'" Bateman Eichler, Hill Richards, Inc. v Berner, 472 U. S. 299, 472 U. S. 310 (1985) (quoting J. I. Case Co. v. Borak, 377 U. S. 426, 377 U. S. 432 (1964)).
The Court of Appeals' elaborate method for calculating damages and interest so as to offset tax benefits supplies an additional reason for rejecting its tax benefit offset rule. We need not inquire whether evidence concerning tax benefits is ordinarily so speculative as to be beyond the jury's province. Cf. Norfolk & Western R. Co. v. Liepelt, 444 U. S. 490 (1980). It is enough that there are formidable difficulties in predicting the ultimate treatment of the investor's claimed tax benefits, whether or not an audit has commenced, and that the burdens associated with reconstruction of the investor's tax history for purposes of calculating interest are substantial. We think that § 28(a) cannot fairly be read to require such a full-scale inquiry into a defrauded investor's dealings with the tax collector lest the investor escape with anything more than his "net economic loss."
Respondents' sole remaining contention is that a rule requiring the offset of tax benefits is required in view of "the economic reality of tax benefits produced by tax shelters." Brief for Respondents 14. They maintain that, since "tax benefits to the partner represent an important tangible economic advantage expected to be derived from his investment," Salcer, supra, at 940, Congress must have intended that tax benefits would reduce the plaintiff's allowable recovery under § 28(a). In support of their version of "economic reality," respondents note that the return from a tax shelter investment may be analyzed as consisting of cash flow, tax benefits, and equity value, Brief for Respondents 11, and that some courts have held that investors may sue for fraud where a tax shelter investment has not produced promised tax benefits. See Sharp v. Coopers & Lybrand, 649 F.2d 175 (CA3 1981), cert. denied, 455 U.S. 938 (1982).
We have already established that Congress did not design § 12(2) to accommodate these arguments, and that § 28(a) does not place them on a surer footing. Respondents essentially ask us to treat tax benefits as a separate asset that is acquired when a limited partner purchases a share in a tax shelter partnership. But the legal form of the transaction does not reflect this treatment. Petitioners purchased securities, thereby acquiring freely alienable rights to any income that accrued to them by virtue of their ownership. They did not, however, also acquire a separate, freely transferable bundle of tax losses that would have value apart from petitioners' status as partners. For obvious reasons, tax deductions and tax credits are not, in the absence of a statutory provision to the contrary, freely transferable from one person to another if wholly severed from the property or activity to which they relate:
[t]he statutes pertaining to the determination of taxable income... disclos[e] a general purpose to confine allowable losses to the taxpayer sustaining them, i.e., to treat them as personal to him, and not transferable to or usable by another.
New Colonial Ice Co. v. Helvering, 292 U. S. 435, 292 U. S. 440 (1934). Accordingly, we decline to treat these tax losses as so much property created by the promoters of the partnership. It is for Congress, not this Court, to decide whether the federal securities laws should be modified to comport with respondents' version of economic reality.
We acknowledge that, absent an offset for tax benefits, plaintiffs may have an incentive to wait to raise their § 12(2) claims until they have received the bulk of the tax benefits available from a tax shelter, since, after their securities are tendered, they will cease to receive tax benefits. We are not persuaded, however, that courts lack adequate means to deal with any potential for abuse on this score. In cases under § 10(b), some courts have barred plaintiffs from electing rescission, or a rescissory measure of damages, where they delayed tender or suit in order to increase their expected recovery should the market decline. See, e.g., Baumel v. Rosen, 412 F.2d 571, 574-575 (CA4 1969), cert. denied, 396 U.S. 1037 (1970); Loss, at 1133, n. 127; Thompson, at 369-370. A similar rule may well be appropriate where plaintiffs delay tender or suit in order to obtain additional tax benefits, although we need not so decide today.
We also have no occasion in this case to decide whether, assuming that a rescissory recovery may sometimes be proper under § 10(b), plaintiffs in such cases should invariably be free to elect a rescissory measure of damages, rather than out-of-pocket damages. Consequently, we do not consider whether courts may ever refuse to allow a rescissory recovery under § 10(b) where the "premium" for expected tax benefits represented a large portion of the purchase price, in which event the out-of-pocket measure might yield a significantly smaller recovery. See Salcer, 774 F.2d at 940, and n. 5. In this case, a rescissory measure of damages was determined to be proper, and respondents have abandoned their initial challenge to that ruling.
We conclude, then, that the Court of Appeals erred in holding that § 28(a) requires a rescissory recovery under § 12(2) or § 10(b) to be reduced by tax benefits received from a tax shelter investment. The judgment is reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
Header photo: United States Supreme Court. Credit: Patrick McKay / Flickr - CC.