UNITED STATES OF AMERICA, Plaintiff - Appellee, v. RAPOWER-3, LLC; INTERNATIONAL AUTOMATED SYSTEMS; LTB1; R. GREGORY SHEPARD; NELDON P. JOHNSON, Defendants - Appellants, and HEIDEMAN & ASSOCIATES, re 290 Motion, Respondent.
No. 18-4119, No. 18-4150
United States Court of Appeals, Tenth Circuit
June 2, 2020
PUBLISH
FILED
United States Court of Appeals
Tenth Circuit
June 2, 2020
Christopher M. Wolpert
Clerk of Court
for the District of Utah
(D.C. No. 2:15-CV-00828-DN-EJF)
Denver C. Snuffer, Jr. (Steven R. Paul, with him on the briefs), Nelson, Snuffer, Dahle & Poulsen, P.C., Sandy, Utah, for Defendants-Appellants.
Clint A. Carpenter (Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Joan I. Oppenheimer, and John W. Huber, United States Attorney, of Counsel, with him on the briefs), Tax Division, Department of Justice, Washington, D.C., for Plaintiff-Appellee.
Before LUCERO, HARTZ, and MATHESON, Circuit Judges.
HARTZ, Circuit Judge.
After a bench trial the district court decided that Defendants—RaPower-3, LLC; International Automated Systems, Inc. (IAS); LTB1, LLC; Neldon Johnson (the sole decision-maker for the preceding entities); and R. Gregory Shepard (who assisted Johnson in marketing and sales for the entities)—had promoted an unlawful tax scheme. To remedy the misconduct, the court enjoined Defendants from continuing to promote their scheme and ordered disgorgement of their gross receipts from the scheme. See United States v. RaPower-3, LLC, 343 F. Supp. 3d 1115 (D. Utah 2018). Defendants appeal. Exercising jurisdiction under
I. THE SCHEME
Defendants’ tax scheme was based on a supposed project to utilize a purportedly new, commercially viable way of converting solar radiation into electricity. Mr. Johnson‘s design, as he advertised it, was to install arrays of framed, triangular plastic
From 2006 to 2008, nineteen towers were constructed at a site near Delta, Utah. The evidence showed that the towers had lenses installed on them, but little more. Many of the towers with receivers “ha[d] no collector or mechanism to transmit energy from a receiver to a generator,” id. at 1124, and Mr. Johnson testified that he had not even determined what substance he would use as the “transfer fluid,” id. at 1125. There was no connection from the towers to the electricity grid; the only thing at the site was “a brown pole with wires dangling from the top.” Id. at 1149.
Mr. Johnson testified that he could have “easily” put electricity onto the grid “at any time since 2005,” but he had “made a business decision” not to do so. Id. at 1147 (internal quotation marks omitted). There was no third party verification of any of Johnson‘s designs.” Id. at 1151. Nor did he have any “record that his system ha[d] produced energy,” and “[t]here [were] no witnesses to his production of a useful product from solar energy,” a fact that he attributed to his decision to do his testing “on the weekends when no one was around because he didn‘t want people to see what he was doing.” Id. (original brackets omitted). Defendant Shepard testified that “the only application that he heard of for [heat from the lenses] was to burn wood, grass, shoes, a man, and a rabbit.” Id. at 1150.
Despite this, Defendants’ project generated tens of millions of dollars between 2005 and 2018. At first the money came from individuals leasing lenses from IAS; but beginning in 2006, buyers would purchase lenses from one of Mr. Johnson‘s entities, IAS or RaPower-3 (or, because Mr. Johnson and Mr. Shepard used a multilevel-marketing structure, from a “downline” marketer who had purchased the lens from IAS or RaPower-3) for a down payment of about one-third of the purchase price. The entity would “finance” the remaining two-thirds of the purchase price with a zero- or nominal-interest, nonrecourse loan. No further payments would be due from the customer until the system had been generating revenue from electricity sales for five years. The customer would agree to lease the lens back to LTB1 for installation at a “Power Plant“; but LTB1 would not be obligated to make any rental payments until the system had begun generating revenue.
The district court found that each plastic sheet for the lenses was sold to Defendants for between $52 and $70, and the correct valuation of each lens was not more than $100, yet the purchase price of a lens was between $3,500 and $30,000. Although Defendants sold between 45,000 and 50,000 lenses, fewer than 5% of them were ever installed. Stacks of uncut plastic sheets were in a warehouse in Utah, and Defendants could not tell which customer owned which lens.
II. TAX-LAW IMPLICATIONS
A. Validity of claimed deductions and credits
The Internal Revenue Code (IRC) provides favorable tax treatment for investments in solar-energy projects and other capital expenditures. But the requirements to qualify are strict, and the government, believing that purchases of lenses for Defendants’ project did not satisfy them, filed this action in the United States District Court for the District of Utah seeking injunctive and other equitable relief against Defendants. After a 12-day bench trial in which Defendants did not call any witnesses, the district court agreed with the government.
The district court concluded, as discussed in more detail below, that Defendants had engaged in conduct subject to penalty under
Defendants’ project fit the bill. The district court found (1) that the benefits of lens ownership were marketed by reference to “the tax benefits it would provide,” RaPower-3, 343 F. Supp. 3d at 1181; (2) that “no customer earned or would earn income from buying solar lenses,” id. at 1174; (3) that “customers had no control over their purported ‘lens leasing’ businesses,” id. at 1179; and (4) that “any purported obligation [of the customer] to pay is substantial—and perhaps indefinitely-deferred debt,” “[c]ustomers borrow for free,” and “the only security for the customers’ promise to pay the[] outstanding amounts is the lens itself,” id. at 1180. The district court concluded that “the solar lenses were a smokescreen for . . . unlawful ‘sales’ of tax deductions and
The district court concluded that depreciation deductions were also not allowed because the lenses were not “placed in service” by the same tax year as the claimed deductions. It relied on Treasury Regulation
In Sealy Power the Fifth Circuit identified five factors from Revenue Rulings for determining when the components of a power-generating system are “placed in service” within the meaning of the Treasury Regulations:
- whether the necessary permits and licenses for operation have been obtained;
- whether critical preoperational testing has been completed;
- whether the taxpayer has control of the facility;
- whether the unit has been synchronized with the transmission grid; and
- whether daily or regular operation has begun.
For those reasons and one additional, the district court determined that the customers were not entitled to the solar-energy credit under
The preponderance of the credible evidence . . . show[ed] that customers’ lenses have never been used in a system that generates electricity, that heats or cools a structure or provides hot water for use in a structure. Nearly all customer “lenses” [were] actually rectangular sheets of plastic sitting in a warehouse, uncut, unframed, and not yet installed on towers. Further, the preponderance of credible evidence show[ed] that even the lenses installed on towers do not “provide solar process heat.”
RaPower-3, 343 F. Supp. 3d at 1185. Thus, there were at least three reasons why lens customers did not qualify for the solar-energy tax credit.
The district court then concluded that even if lens customers were entitled to depreciation deductions and solar-energy credits, they were not allowed to claim deductions or credits in excess of their income from “passive” activities. The court
Finally, the district court concluded that under
B. Existence of a Tax Shelter Under 26 U.S.C. § 6700
The district court construed
The district court determined that Defendants’ “solar energy scheme [was] a ‘plan’ under § 6700 because the key component of the scheme was its promoted connection to
The district court further determined that Defendants made false or fraudulent statements about material matters by asserting that customers could claim deductions and credits in connection with their lens purchases. It explained that these statements were material because they “would have a substantial impact on the decision-making process of a reasonably prudent investor and include matters relevant to the availability of a tax benefit.” Id. at 1171 (quoting Campbell, 897 F.2d at 1320).
And finally, the district court concluded that the scienter element of
A court may conclude that a promoter had reason to know his statements are false or fraudulent based on what a reasonable person in the defendant‘s subjective position would have discovered. The trier of fact may impute knowledge to a promoter, so long as it is commensurate with the level of comprehension required by his role in the transaction. A person selling a plan would ordinarily be deemed to have knowledge of the facts revealed in the sales materials furnished to him by the promoter. A person who holds himself out as an authority on a tax topic has reason to know whether his statements about that topic are true or false. The test . . . is satisfied if the defendant had reason to know his statements were false or fraudulent, regardless of what he actually knew or believed.
Id. at 1173 (brackets, emphasis, citations, and internal quotation marks omitted). Under this test, Defendants knew all the facts indicating that lens customers were not entitled to claim the promoted deductions or credits. Further, their defense that they relied on the
The district court also concluded that Defendants had violated
C. Injunctive and Equitable Relief
The district court ruled that injunctive and other equitable relief was appropriate under
Defendants appeal, raising a number of issues, to which we now turn.
III. DISCUSSION
A. Issues Addressed Summarily
Most of Defendants’ arguments on appeal can be disposed of summarily. First, they complain that the due-process rights of Solco I and XSun Energy, entities that were “created, own[ed], and control[led]” by Mr. Johnson, RaPower-3, 343 F. Supp. 3d at 1127, were violated by an order of the district court to freeze their assets. But Defendants do not complain that their own rights were injured by the district court‘s order and have made no effort to explain how they have standing to assert the rights of those entities, even after the United States raised the issue of standing in its appellate brief. We therefore decline to address the issue.
Second, Defendants say that evidence obtained after trial necessitates a remand to the district court with instructions to dissolve the injunction. We understand this argument to be a challenge to the district court‘s denial of their motion to alter or amend the judgment under
Third, Defendants contend that the district court improperly denied them a jury trial. They filed a jury demand two months after this lawsuit was filed. On the government‘s motion the magistrate judge assigned to the case struck Defendants’ jury demand on May 2, 2016, on the ground that there was no Seventh Amendment right to a jury because the United States was seeking only equitable relief. The court later set the deadline for pretrial motions at November 17, 2017. On February 9, 2018, Defendants again moved for a jury trial, relying largely on the June 5, 2017, decision of the Supreme Court in Kokesh v. S.E.C., 137 S. Ct. 1635. The district court denied Defendants’ motion on two grounds: (1) on the merits, Kokesh did not support Defendants’ jury demand; and (2) the renewed motion for a jury trial was untimely. On appeal Defendants challenge the first ground but not the second. Because they have not challenged the district court‘s
Fourth, Defendants challenge the district court‘s determination that they knowingly engaged in a fraudulent tax scheme. In essence, they claim there is insufficient evidence to support the court‘s decision. But the challenge is wholly inadequate to preserve the issue for consideration. The case was tried over the course of 12 days. The district court‘s opinion, which occupies about 82 pages in the official reports, includes 427 findings of fact. The opening brief devotes a little less than 12 pages to the issue. It recites a smattering of evidence favorable to Defendants but wholly fails to deal with the voluminous contrary evidence. It does not identify a single finding of fact by the district court that is unsupported by evidence at trial. There is some discussion of the law, but that discussion does not grapple with the specific evidence presented in this case. In this circumstance, this court has no obligation to conduct what would amount to a de novo review of the trial evidence to see whether it supports the district court‘s rulings. See Nixon, 784 F.3d at 1366 (“[C]ounsel for appellant ... tells a story of injustice and argues against positions not adopted by the district court. Counsel utterly fails, however, to explain what was wrong with the reasoning that the district court relied on in reaching its decision.“); United States v. Apperson, 441 F.3d 1162, 1195
Moreover, the record on appeal would not permit us to conduct such a factual review. The record includes some exhibits offered at trial but only a fraction of the testimony (and that fraction appears in the appellee‘s appendix, not the appellant‘s appendix). Under
Defendants challenge the district court‘s disgorgement awards. “[D]isgorgement is a form of ‘restitution measured by the defendant‘s wrongful gain.‘” Kokesh, 137 S. Ct. at 1640 (quoting Restatement (Third) of Restitution and Unjust Enrichment § 51, cmt. a, p. 204 (Am. Law Inst. 2010) (original brackets omitted) (hereafter, the Restatement)). It “is by nature an equitable remedy as to which a trial court is vested with broad discretionary powers.” S.E.C. v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006) (internal quotation marks omitted).
The district court held Defendants jointly and severally liable for disgorgement of $50,025,480, with the maximum for each Defendant set at the amount of gross receipts received by that Defendant from the solar-energy scheme; Johnson was liable for the full amount, RaPower‘s limit was set at $25,874,066, IAS‘s limit was $5,438,089, and Shepard‘s was $702,001. The court did not deduct operating expenses of the companies, quoting the Restatement § 51(5)(c) for the proposition that a defendant “will not be allowed any credit of operating expenses to ‘carry[ ] on the business that is the source of the profit subject to disgorgement.‘” RaPower-3, 343 F. Supp. 3d at 1196 & n.633.1
First, they contend that they did not intentionally defraud investors because they “encouraged. . . customers to seek their own tax advice.” Aplt. Br. at 26. But, as with their challenge to the ruling that they had engaged in a fraudulent scheme, their argument is inadequate. They do not specifically challenge any relevant findings of the district court, address the evidence relied on by the court, or even include in the record the testimony and other evidence that would enable us to make an independent judgment of the sufficiency of the evidence.
Defendants also complain about the district court‘s finding that they had damaged the United States Treasury in the amount of $14,207,517 through tax benefits claimed by lens customers between 2013 and 2016. But it does not appear that the district court used that figure in computing disgorgement amounts.
Another complaint by Defendants is that the awards permit double recovery against them. But there can be no double recovery. Although Defendants are jointly liable for certain amounts, the government cannot collect the sum of the separate awards against them. To the extent that two of them are jointly and severally liable for the same amount, the government can collect from either, but not both. For example, if RaPower
Defendants’ principal complaint is the amount of the disgorgement awards. We have stated that the plaintiff has the burden of showing gross receipts, while the defendant has the burden of proving any claimed deduction. See Klein-Becker, 711 F.3d at 1163. The Restatement § 51 cmt. i observes that “the precise amount of the defendant‘s unjust enrichment may be difficult or impossible to ascertain.” But “a claimant who is prepared to show a causal connection between defendant‘s wrongdoing and a measurable increase in the defendant‘s net assets will satisfy the burden of proof as ordinarily understood.” Id. “[P]laintiffs must generally establish damages with specificity,” although “some estimation is acceptable if necessitated in part by the [d]efendant‘s poor record keeping.” Klein-Becker, 711 F.3d at 1163 (original brackets and internal quotation marks omitted). Any uncertainty is resolved against the “conscious wrongdoer,” in keeping with the rule that “when damages are at some unascertainable amount below an upper limit and when the uncertainty arises from the defendant‘s wrong, the upper limit will be taken as the proper amount.” Restatement § 51 cmt. i (quoting Gratz v. Claughton, 187 F.2d 46, 51–52 (2d Cir. 1951) (L. Hand, J.)).
Defendants argue that the district court should have subtracted operating expenses from the gross receipts to determine the amount that should be disgorged. But they acknowledge that “a defendant is not allowed to deduct business expenses from the disgorgement amount if the business was created and run to ‘defraud investors.‘” Aplt.
Defendants further complain that the government at various times suggested a wide range of possible damages. But they fail to explain how the government‘s earlier suggestions could have improperly influenced the court‘s award.
Finally, Defendants challenge the way the district court computed the gross receipts from their enterprises. The court relied on Defendants’ customer database, which apparently included transactions almost up to the time of trial, and showed that they sold 49,415 lenses and customers paid in $50,025,480 through February 28, 2018. This was less than what would have come in if customers had made only the down payment on each lens. The down payment from customers was to be $9,000 from 2006 through 2009 and $1,050 after 2009. Multiplying the lower down payment of $1,050 by the number of lenses sold gives a figure of $51,885,750. The court said that its award was also supported by the government‘s bank-deposit analysis for deposits through 2016.
Defendants argue that the customer database was misinterpreted, leading to an excessively high figure. But it was their database and they would know better than anyone how to interpret the data; yet they offered no testimony regarding the database. Nor have they pointed to any errors by the court that appear on the face of the database. For example, their reply brief states that the database “contains entries listing a small down payment, some entries show a partial down payment, some of those payments bounced (but could not be deleted from the database), some orders were canceled (but
In our view, the district court‘s computation was not clearly erroneous because it was a reasonable approximation. It used Defendants’ own business records to determine how many lenses were sold, and multiplied that by a conservative estimate of the amount paid for each lens. Defendants argue about ambiguities in their own records that led the court to calculate an excessively high gross-receipts figure; but they bore the risk of uncertainty, particularly when caused by their own record keeping, obstruction of
We affirm the disgorgement awards against Defendants.
C. Alleged Discovery Violations
1. Computation of Damages
Defendants challenge the district court‘s admission of evidence that supported the amount of disgorgement, contending that the evidence had not been adequately disclosed before trial.
The district court denied Defendants’ motion in limine to exclude evidence and testimony relating to disgorgement, ruling that “[d]isgorgement is not a damages remedy, and therefore ‘the disclosure required by Rule 26(a)(1)(A)(iii) is inapplicable.‘”
In any event, even if the rule applied to the government here, it was satisfied. The evidence necessary to determine Defendants’ gross receipts for the purpose of assessing disgorgement was in the hands of Defendants. The government was reasonably forthcoming once it obtained that evidence. The government‘s initial disclosure in April 2016 said that it would seek “disgorgement of the . . . gross receipts . . . [Defendants]
To make a more complete assessment of what disgorgement damages it would seek, the government needed to review Defendants’ records that would show how many lenses had been purchased and how much money they had taken in. But despite discovery requests for those records in April 2016 and a motion to compel filed in August 2017, Defendants were not forthcoming. Finally, on October 16, 2017, Defendants provided 190 pages of customer information. With that information, the government disclosed about five months before trial a disgorgement figure in the same ballpark as the ultimate award. On November 17, 2017, it moved for an order to freeze Defendants’ assets and appoint a receiver “to ensure that Defendants will have the funds to pay any disgorgement this Court may award.” United States’ Mot. to Freeze the Assets of Defs. Neldon Johnson, RaPower-3, LLC, and International Automated Systems, Inc. and Appoint a Receiver at 5, Nov. 17, 2017, ECF No. 252. Its supporting memorandum argued that the amount frozen should equal the number of lenses sold by Defendants
The October disclosure by Defendants, however, was still incomplete. In January, the district court, no longer willing to rely on voluntary compliance by Defendants, ordered Defendants to allow the government‘s computer forensic expert to make a copy of the customer database from their computer equipment. The government finally obtained the raw data on February 28. It therefore took some chutzpah for Defendants to file on March 5 a motion in limine to exclude testimony regarding disgorgement damages on the ground that the government had not disclosed its calculations in a timely manner.
Once the context is understood, any complaint that the government violated Rule 26 by failing to timely produce its disgorgement calculations is plainly without merit. Because the government was required only to supplement its initial Rule 26(a)(1)(A)(iii) disgorgement computation “if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing,” because the information was largely “made known” to Defendants in the government‘s motion to freeze their assets, and because the complete evidence of Defendants’ gross receipts was not obtained by the government until shortly before the motion in limine was filed, it was not an abuse of discretion for the district court to admit the government‘s evidence of Defendants’ gross receipts.
It is not an abuse of discretion to allow a nonexpert witness to testify regarding “elementary mathematical operations.” James River Ins. Co. v. Rapid Funding, LLC, 658 F.3d 1207, 1214 (10th Cir. 2011); see Bryant v. Farmers Ins. Exch., 432 F.3d 1114, 1124 (10th Cir. 2005) (“Taking a simple average of 103 numbers, though technically a statistical determination, is not so complex a task that litigants need to hire experts in order to deem the evidence trustworthy“). Defendants have waived their challenge by not including in the record on appeal the testimony they ask us to review. See Deines, 969 F.2d at 979. But in any event, the testimony that we do have for review did not require expert credentials. For example, the government witness who testified regarding the harm to the United States Treasury simply multiplied the IRS‘s publicly available
IV. CONCLUSION
We AFFIRM the judgment below.
Notes
A conscious wrongdoer or a defaulting fiduciary may be allowed a credit for money expended in acquiring or preserving the property or in carrying on the business that is the source of the profit subject to disgorgement. By contrast, such a defendant will ordinarily be denied any credit for contributions in the form of services, or for expenditures incurred directly in the commission of a wrong to the claimant.
Restatement 3d, § 51(5)(c).