United States v. RaPower-3
960 F.3d 1240
10th Cir.2020Background
- Neldon Johnson and associates marketed and sold plastic “solar lenses” as parts of a new solar-electric system; towers were built but the system was never a commercial, grid-connected electricity producer.
- Sales used multilevel marketing: buyers paid ~1/3 down and financed the rest with nominal, nonrecourse loans; buyers purportedly leased lenses back for installation—but <5% of sold lenses were installed and many remained uncut in a warehouse.
- Sales were promoted principally on the tax benefits: claimed depreciation deductions and §48 solar energy tax credits.
- The government sued under the Tax Code seeking equitable relief; after a 12-day bench trial (Defendants called no witnesses) the district court found the scheme abusive, enjoined promotion, and ordered disgorgement of gross receipts (~$50M).
- District court holdings (summarized): customers could not claim depreciation or credits (not placed in service; not qualifying energy property; passive-activity and at‑risk limits applied); promoters violated 26 U.S.C. §6700 (false statements and gross overvaluation); disgorgement of gross receipts was proper without deduction for operating expenses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of customers’ depreciation deductions and §48 credits | Customers were not in a bona fide trade or business, lenses were not placed in service, lenses were not qualifying energy property, passive-activity and §465 at‑risk limits barred claimed benefits | Customers legitimately acquired depreciable energy property; relied on counsel; system could produce electricity | Court: Customers not entitled to deductions/credits—activity was a tax‑avoidance scheme; lenses not placed in service or qualifying; passive and at‑risk rules barred excess claims |
| Liability under 26 U.S.C. §6700 (promoter penalties) | Promoters organized and sold a tax‑based plan, made material false/fraudulent statements and grossly overvalued lenses | Promoters lacked scienter; relied on tax advice; did not knowingly mislead | Court: §6700 liability established—promoters made material false statements, engaged in gross overvaluation, and had reason to know statements were false |
| Equitable remedies and disgorgement amount | Injunction under §§7408/7402 and disgorgement of gross receipts necessary to stop ongoing violations and remedy unjust enrichment; use gross receipts without business‑expense offsets | Awards were excessive, double recovery risk, calculation errors, discovery/Rule 26 and expert‑disclosure violations | Court: Injunction and disgorgement affirmed; gross receipts based on defendants’ records were a reasonable approximation and operating expenses not credited for conscious wrongdoers; discovery/expert objections rejected |
| Procedural challenges (jury trial; post‑trial evidence; disclosure) | Defendants sought a jury (citing Kokesh), moved for relief on new evidence (Rule 59), and attacked disclosure of disgorgement/expert testimony | Defendants argued denial of jury and refusal to consider new evidence violated rights; claimed untimely disclosures and need for expert reports | Court: Jury demand denied as untimely; Rule 59 motion to reopen denied; disclosure and expert‑designation objections were not persuasive and largely waived by defendants |
Key Cases Cited
- Kokesh v. S.E.C., 137 S. Ct. 1635 (2017) (disgorgement characterized as a penalty for statute‑of‑limitations purposes)
- Nickeson v. Commissioner, 962 F.2d 973 (10th Cir. 1992) (factors for when an activity is an abusive tax scheme rather than a bona fide trade or business)
- Sealy Power, Ltd. v. Commissioner, 46 F.3d 382 (5th Cir. 1995) (five-factor test for when power‑system components are "placed in service")
- United States v. Campbell, 897 F.2d 1317 (5th Cir. 1990) (promoter liability for gross overvaluation in tax‑shelter schemes)
- Autrey v. United States, 889 F.2d 973 (11th Cir. 1989) (promoter strict liability for grossly overstating value supporting a tax deduction)
- S.E.C. v. Maxxon, Inc., 465 F.3d 1174 (10th Cir. 2006) (disgorgement as an equitable remedy within court's broad discretion)
- Klein-Becker USA, LLC v. Englert, 711 F.3d 1153 (10th Cir. 2013) (plaintiff bears burden to prove gross receipts; some estimation allowed where defendant's records are incomplete)