Opinion ID: 880774
Heading Depth: 1
Heading Rank: 8

Heading: 4(c Offsetting Tax Benefits.

Text: Peat Marwick contends that since the jury found it liable for the damages caused to the Clinic by the loss of the IRB, Peat Marwick is entitled to an offset of the tax benefits that the individual doctors received by proceeding with the reorganization. These benefits had a present value in 1982 of approximately $311,000. The District Court refused to permit this testimony from defendant Don Blackwell. Peat Marwick contends that a damages award for a tort or a breach of contract may be offset by the benefits received by the plaintiff from the complained-of transaction. ECA Environmental Management v. Toenyes (1984), 208 Mont. 336, 348, 679 P.2d 213, 219, and Restatement (Second) of Torts, § 920, (1979) (stating that when defendant's tortious conduct confers a special benefit on the individual or plaintiff that was harmed, the value of the benefit may be considered a mitigation of damages when equity requires). Peat Marwick also contends that virtually all of the doctors were in the 50 percent marginal income tax bracket in 1982 for federal income tax purposes, and that the maximum tax rates are now 28 percent. Peat Marwick argues that the doctors have realized a permanent tax benefit consisting of the difference between those two rates. The District Court refused to allow Peat Marwick to present any evidence of the tax benefits thereby conferred on the individual doctors. Peat Marwick is not entitled to such an offset. The objective of compensatory damages is to restore to the injured or damaged party the position or state the party would have attained had the tort or the breach of contract not occurred. In this case, as the jury found, if Peat Marwick had properly done its job, the Clinic would have had the benefit both of the tax benefits arising from the reorganization through stepped-up depreciation allowances, and also the lower cost of the favorable tax-exempt status of IRB financing. (Testimony showed that if the Clinic had been alerted to the ramifications of IRB financing under § 103, the reorganization would have been delayed a period of three years to eliminate the capital expenditure problem, but the IRB financing would have proceeded immediately.) Without doubt, the failure of the IRB financing resulted in a higher interest cost for the loans required for the construction of the addition to the Clinic. To reduce that higher cost by the tax benefits to which the Clinic was otherwise by law entitled would do no equity. The two items are not related so that one benefit is the result of the other. The Clinic has cited Randall v. Loftsgaarden (1986), 478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525, for the rule that a plaintiff's recovery for rescissionary damages under the Securities Act of 1933 should not be reduced by the amount of tax benefits obtained by the plaintiff as a result of the fraudulently-induced investment. While Randall is applicable in a fashion, it is based on the public policy of the federal government to award damages to deter fraud in securities cases. In the ordinary course of things however, tax benefits come to individuals by force of federal or state governmental laws and not through the beneficence of nongovernmental third parties. This Court has refused to acknowledge tax benefits as offsets in Anderson v. Burlington Northern Inc. (1985), 218 Mont. 456, 464, 709 P.2d 641, 648, cert. denied 476 U.S. 1174, 106 S.Ct. 2902, 90 L.Ed.2d 988 (1986); and Tribby v. Northwestern Bank of Great Falls (1985), 217 Mont. 196, 209, 704 P.2d 409, 417. In Ehly v. Cady (1984), 212 Mont. 82, 97, 687 P.2d 687, 694, this Court allowed a plaintiff to recover lost investment tax credits that were supposed to be a major benefit of his bargain. The damages suffered by the Clinic in this case were the loss of the IRB financing, and the accompanying result of lower interest costs to the Clinic. That loss was real, and quite separate from any gained realized by the Clinic (and passed through to the doctors) from the reorganization. The foregoing position also prevents any consideration by us or by the District Court that the income tax rates in 1986 were reduced from a 50 percent top to a 28 percent maximum, as contended by Peat Marwick. Evidence of the tax benefits to the individual doctors would be speculative in the extreme, assuming without agreeing that it would be proper to look to the partners individually, instead of the partnership entity known as the Clinic. This Court prophetically stated in Bracy v. Great Northern Railway Company (1959), 136 Mont. 65, 74, 343 P.2d 848, 853, The tax liability of today is no criterion of what it may be tomorrow. It has a faculty of constantly increasing in the face of vocal threats of reduction usually made on the evening of an election. The rule that damages must be reasonably certain in their nature and origin applies with equal force to claimed offsets to damages. We find no merit in these issues.