FILED United States Court of Appeals PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS June 2, 2020
Christopher M. Wolpert FOR THE TENTH CIRCUIT Clerk of Court _________________________________
UNITED STATES OF AMERICA,
Plaintiff - Appellee.
v. No. 18-4119
RAPOWER-3, LLC; INTERNATIONAL AUTOMATED SYSTEMS; LTB1; R. GREGORY SHEPARD; NELDON P. JOHNSON,
Defendants - Appellants.
–––––––––––––––––––––––––––––––––––
Plaintiff - Appellee,
v. No. 18-4150
RAPOWER-3, LLC; INTERNATIONAL AUTOMATED SYSTEMS; LTB1; R. GREGORY SHEPARD; NELDON P. JOHNSON,
Defendants - Appellants,
and
HEIDEMAN & ASSOCIATES, re 290 Motion,
Respondent. _________________________________ Appeal from the United States District 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 28 U.S.C. § 1291, we affirm.
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
2 sheets (“lenses”) on towers. The lens arrays would track the sun and focus its radiation
onto a “receiver,” where it would heat a “heat transfer fluid.” RaPower-3, 343 F. Supp.
3d at 1124. The transfer fluid would be pumped to a “heat exchanger” to boil water and
generate steam. Id. at 1125. The steam would spin a turbine to produce electricity,
which would be sent onto wires connected to the electricity grid.
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.
3 Needless to say, Defendants never secured a purchase agreement for the sale of
electricity to an end user. The district court found that “Johnson’s purported solar energy
technology is not now, has never been, and never will be a commercial-grade solar
energy system that converts sunlight into electrical power or other useful energy.” Id.
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.
4 Customers were told that buying a lens would have very favorable income-tax
consequences. Mr. Johnson and Mr. Shepard sold the lenses by advertising that
customers could “zero out” federal income-tax liability by taking advantage of
depreciation deductions and solar-energy tax credits.
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 26 U.S.C. § 6700(a)(2)(A) by telling
customers that they could claim solar-energy tax credits under 26 U.S.C. § 48 and
depreciation deductions under 26 U.S.C. § 167(a), including deductions and credits in
excess of both passive income, see 26 U.S.C. § 469, and the amounts at risk, see 26
U.S.C. § 465. It also concluded that Defendants engaged in conduct subject to penalty
under § 6700(a)(2)(B) because they made a gross-valuation overstatement “each time
they told someone the price of a lens (whether $9,000, $3,000, or $3,500).” RaPower-3,
343 F. Supp. 3d at 1191.
5 The district court determined that Defendants’ “customers were not allowed a
depreciation deduction or the solar energy credit” for several reasons. Id. at 1173. To
begin with, “customers were not allowed a depreciation deduction . . . because [they]
were not in a ‘trade or business’ related to the solar lenses and did not hold the lenses for
the production of income.” Id. The court evaluated whether customers had acquired
lenses in good faith with the primary purpose of earning a profit. It relied on Tenth
Circuit precedent, in particular Nickeson v. Commissioner, 962 F.2d 973 (10th Cir. 1992),
which identifies factors indicating that an activity is an abusive tax scheme as opposed to
a bona fide trade or business. The factors include: “marketing on the basis of projected
tax benefits, grossly inflated purchase price set without bargaining, failure of taxpayers to
inquire into the potential profitability of the program, taxpayers’ lack of control over
activities, and use of nonrecourse indebtedness[.]” Id. at 977 (citations omitted).
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
6 credits to customers,” id. at 1182, and that “customers’ ‘lens leasing’ businesses were not
bona fide and ongoing businesses,” id. at 1183.
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 26 C.F.R. § 1.167(a)–10(b), which prohibits
depreciation deductions unless the property for which the deduction is sought had been
“placed in service” by the year that the deduction is claimed. “Property is first placed in
service when first placed in a condition or state of readiness and availability for a
specifically assigned function, whether in a trade or business, in the production of
income, in a tax-exempt activity, or in a personal activity.” 26 C.F.R. § 1.167(a)–
11(e)(1)(i). The district court evaluated whether the lenses were “placed in service”
under the framework articulated in Sealy Power, Ltd. v. Commissioner, 46 F.3d 382 (5th
Cir. 1995), action on decision, AOD-1995-10 (Aug. 7, 1995), nonacq., 1995-33 I.R.B. 4,
1995-2 C.B. 1 (Aug. 14, 1995).
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:
1) whether the necessary permits and licenses for operation have been obtained; 2) whether critical preoperational testing has been completed; 3) whether the taxpayer has control of the facility; 4) whether the unit has been synchronized with the transmission grid; and 5) whether daily or regular operation has begun.
7 Id. at 395. Because none of these factors was met in Defendants’ system and because
“the bulk of customers’ ‘lenses’ [were] not installed on towers,” the district court
concluded they were not “placed in service.” RaPower-3, 343 F. Supp. 3d at 1184.
For those reasons and one additional, the district court determined that the
customers were not entitled to the solar-energy credit under 26 U.S.C. § 48. Taxpayers
can claim a credit for a percentage of the “basis” (generally the cost) of qualifying
“energy property.” 26 U.S.C. §§ 46(2); 48(a)(1), (2)(A)(i)(II). But to qualify for the
credit the property must be depreciable, see id. § 48(a)(3)(C), and placed in service
during the taxable year, see id. § 48(a)(1). And, for the reasons just discussed, the lenses
did not satisfy either requirement. Moreover, the lenses did not satisfy the requirement
that the property be “equipment which uses solar energy to generate electricity, to heat or
cool (or provide hot water for use in) a structure, or to provide solar process heat.” Id. §
48(a)(3)(A)(i). The district court found:
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
8 explained that Ҥ 469 generally prohibits the deduction of passive activity losses, except
insofar as the losses are used to offset passive activity income,” and that “[a]ctivity that
involves the rental of tangible property is” a passive activity. RaPower-3, 343
F. Supp. 3d at 1185–86. Therefore, lens customers were not allowed to use “deductions
and credits from purportedly leasing out solar lenses . . . to offset active income or tax on
active income.” Id. at 1185–86.
Finally, the district court concluded that under § 465, lens customers were not
allowed to claim deductions or credits in excess of their down payments on the lenses. It
explained that losses incurred in connection with certain statutorily enumerated activities,
including leasing depreciable property, see 26 U.S.C. § 465(c)(1)(C), cannot be deducted
from income in excess of the amount that the taxpayer has “at risk” in the activity, id. §
465(a). The amount “at risk” is in general the amount of money (and the adjusted basis
of property) the taxpayer has contributed to the activity. Id. § 465(b). The district court
concluded that lens customers had no money at risk because (1) the purchase contracts
“contained an explicit statement that a customer could get a refund of all amounts paid in,
without penalty, if either IAS or RaPower-3 did not perform on the contract,” and (2)
there was no enforceable obligation to personally repay the nonrecourse, zero-interest
loan used to finance the balance of the purchase price. RaPower-3, 343 F. Supp. 3d at
1188. Therefore, lens customers “were not allowed to claim a depreciation deduction for
the full purchase price or any related amount.” Id. at 1188–89.
9 In short, the district court concluded that customers were not allowed to claim the
deductions or credits that Defendants advertised in connection with owning and leasing a
lens.
B. Existence of a Tax Shelter Under 26 U.S.C. § 6700
The district court construed § 6700(a)(2)(A) to permit the imposition of a penalty
against any “person who 1) organizes or sells any plan or arrangement involving taxes
and 2) makes or furnishes, or causes another to make or furnish, a statement connecting
the allowability of a tax benefit with participating in the plan or arrangement, which
statement the person knows or has reason to know is false or fraudulent as to any material
matter.” Id. at 1170. Penalties can also be recovered from one who sells a service or
product at a grossly inflated price (more than twice the correct value, see 26 U.S.C. §
6700(b)(1)(A)), so that customers can claim excessive tax benefits. See id. §
6700(a)(2)(B); United States v. Campbell, 897 F.2d 1317, 1322 (5th Cir. 1990)
(explaining that tax shelters based on gross overvaluations “eliminate the buyer’s
incentive to pay no more than the investment’s value because the financing mechanism
allows the buyer to save more in tax benefits than is paid for the investment. That
economic incentive pushes the price above the value”); see also Autrey v. United States,
889 F.2d 973, 981 (11th Cir. 1989) (“[A] promoter is in essence strictly liable for grossly
overstating the value of property or services based upon which an investor will attempt to
take a deduction or credit.”).
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
10 the federal tax benefits of a depreciation deduction and a solar energy tax credit.”
RaPower-3, 343 F. Supp. 3d at 1170. And it found that all the Defendants “organized, or
assisted in organizing the scheme, and sold the scheme to customers either directly or
through other people.” Id.
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 at1320).
And finally, the district court concluded that the scienter element of
§ 6700(a)(2)(A) was met because Defendants knew or had reason to know that their
statements were false or fraudulent. It applied the following test:
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
11 advice of counsel that their customers were entitled to all of the promoted tax benefits
was unavailing because “[i]f anything, the circumstances surrounding the writings [of the
attorneys on whom they purportedly relied], and the attorneys’ outraged response to
learning that Defendants were using their writings to promote the solar energy scheme,
bolster Defendants’ reason to know that their statements were false or fraudulent.” Id. at
1190.
The district court also concluded that Defendants had violated § 6700(a)(2)(B) by
making gross overstatements as to the value of the lenses. It determined that each sheet
of plastic from which lenses were to be cut cost Defendants between $52 and $70, and
that “[b]ased on the available and credible evidence, . . . the correct valuation of any
‘lens’ is close to its raw cost, and does not exceed $100.” Id. at 1191. Defendants were
selling each lens for $3,500, so the court held that they “engaged in conduct subject to
penalty under § 6700(a)(2)(B) and made or furnished a gross valuation overstatement
each time they told someone the price of a lens[.]” Id.
C. Injunctive and Equitable Relief
The district court ruled that injunctive and other equitable relief was appropriate
under 26 U.S.C. § 7408 (which authorizes the government to seek injunctive relief to
prevent ongoing conduct subject to penalty under § 6700 and other specified sections of
the Tax Code) and § 7402(a) (which grants district courts jurisdiction to issue injunctions
and other equitable relief to enforce the Tax Code), because Defendants had engaged in
the scheme for many years; they knew that their statements about tax benefits were false
or fraudulent; the scheme had caused great harm, including harm to the federal treasury;
12 and Mr. Johnson’s and Mr. Shepard’s lack of remorse and continuation of the scheme
after the IRS began investigating their scheme indicated that they were very likely to
continue promoting their abusive tax scheme unless enjoined from doing so. It issued an
injunction to prohibit Defendants from continuing to engage in the conduct that was
subject to penalty under § 6700. For the same reasons that an injunction was appropriate,
the district court ordered Defendants to disgorge their gross receipts from lens sales.
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 Federal Rule of Civil Procedure 59(e). In that motion they asked for
an amendment or alteration of the judgment in light of new evidence that their system
13 worked to produce electricity. The alleged new evidence was expert testimony that a
system involving a commercially available engine had been used, in connection with the
lenses at the Delta site, to produce electricity after the trial was conducted. The court
denied the motion because “[t]he expert testimony that Defendants now seek to introduce
was within their control to produce before and at trial.” Order Denying Rule 59(e) and
Rule 52(b) Mot., Dec. 4, 2018, ECF No. 529. Defendants do not challenge that statement
or otherwise argue that there was anything preventing them from producing this evidence
before or during trial. We therefore affirm the denial of their Rule 59(e) motion. See
Nixon v. City & Cty. of Denver, 784 F.3d 1364, 1369 (10th Cir. 2015) (“[W]e affirm the
district court’s dismissal of the stigma-plus due-process claim because [Appellant]’s
opening brief contains nary a word to challenge the basis of the dismissal[.]”).
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
14 alternative ground for its ruling, we affirm. See Starkey ex rel. A.B. v. Boulder Cty. Soc.
Servs., 569 F.3d 1244, 1252 (10th Cir. 2009) (“When an appellant does not challenge a
district court’s alternate ground for its ruling, we may affirm the ruling.”). Defendants’
argument in their reply brief comes too late. See Stump v. Gates, 211 F.3d 527, 533 (10th
Cir. 2000) (“This court does not ordinarily review issues raised for the first time in a
reply brief.”).
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
15 (10th Cir. 2006) (“[Appellant] purports to challenge the district court’s ruling on all of
the categories of evidence it prohibited him from using to cross-examine [a witness], but
fails to offer any detailed explanation of how the district court erred. Accordingly, we
conclude he has failed to sufficiently place these rulings at issue.”); Anderson v.
Hardman, 241 F.3d 544, 545 (7th Cir. 2001) (“[A] brief must contain an argument
consisting of more than a generalized assertion of error, . . . Yet [appellant] offers no
articulable basis for disturbing the district court’s judgment.”).
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 Fed. R. App. P. 10(b)(2), “[i]f the appellant intends to urge on appeal
that a finding or conclusion is unsupported by the evidence or is contrary to the evidence,
the appellant must include in the record a transcript of all evidence relevant to that
finding or conclusion.” As we have explained: “Our appellate review is necessarily
limited when . . . an appellant challenges the sufficiency of the evidence and rulings of
the district court but fails to include in the record a transcript of all evidence relevant to
such finding or conclusion.” Deines v. Vermeer Mfg. Co., 969 F.2d 977, 979 (10th Cir.
1992) (internal quotation marks omitted); see United States v. Brody, 705 F.3d 1277,
1280 (10th Cir. 2013) (“By failing to file a copy of the trial transcript as part of the record
on appeal, the appellant waives any claims concerning the sufficiency of the evidence at
trial.” (internal quotation marks omitted)).
16 B. Disgorgement Order
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
1 The Restatement provision states:
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.
17 We review for clear error the computation of the disgorgement amount and we
review de novo the method for determining that amount. See Klein-Becker USA, LLC v.
Englert, 711 F.3d 1153, 1162 (10th Cir. 2013) (disgorgement award under the Lanham
Act). Defendants raise several arguments against the awards.
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
Restatement 3d, § 51(5)(c).
18 paid the full $25,874,066 it owes, that amount would be subtracted from Johnson’s
liability.
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.
19 Br. at 25. They simply assert that “Plaintiff did not show Defendants intentionally
defrauded investors.” Id. But they do not muster an adequate challenge to the
sufficiency of the evidence on that score.
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
20 could not be deleted), and some amounts are refunded (but cannot be deleted) and all
contracts offered a full refund.” Aplt. Rep. Br. at 7. The brief, however, does not
identify any specific entries supporting their assertion, nor do they identify any evidence
in the record supporting the claim that certain entries could not be deleted from the
database. This failure to support their arguments with evidence is not just a lapse on
appeal; they failed at trial as well. As the district court said, “Defendants—who are the
ones in possession of the best evidence of a reasonable approximation of their gross
receipts—failed to rebut the United States’ evidence of this reasonable approximation,
and introduced no credible evidence of their own on the point.” RaPower-3, 343
F. Supp. 3d at 1195. Similarly, although it is not clear to us from the limited appellate
record whether the district court’s gross-receipts estimate is well-supported by the bank-
deposit evidence (the record contains document summaries but no testimony explaining
them), the failure of Defendants to include the bank-deposit testimony in the appellate
record makes it impossible for us to evaluate the bank-deposit evidence; and, in any
event, Defendants, as with so many other issues, do not adequately argue the matter in
their briefs.
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
21 discovery (further discussed below), and decision not to put on any evidence or call any
witnesses who could have helped the court reach a more precise estimate of their receipts
or any legitimate expenses.
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. Federal Rule of Civil Procedure 26(a)(1)(A)(iii) requires each party to
“provide to the other parties . . . a computation of each category of damages claimed by
the disclosing party.” Moreover, the claimant has an ongoing duty throughout the
litigation to supplement the damages computation “in a timely manner [(1)] if the party
learns that in some material respect the [initial] disclosure or response is incomplete or
incorrect, and [(2)] if the additional or corrective information has not otherwise been
made known to the other parties during the discovery process or in writing[.]” Fed. R.
Civ. P. 26(e)(1)(A). If a party fails to disclose or, where appropriate, supplement
computations, Federal Rule of Civil Procedure Rule 37(c)(1) prohibits the use of that
“information or witness to supply evidence . . . unless the failure was substantially
justified or is harmless.”
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.’”
22 Aplt. App., Vol. I at 115 (quoting United States v. Stinson, 2016 WL 8488241, at *7
(M.D. Fla. 2016)). We are not so sure that disgorgement does not come within the
meaning of damages in the rule. The advisory committee note to the 1993 amendments
to Rule 26 (addressing 26(a)(1)(C), which became 26(a)(1)(A)(iii) in the 2007
amendment restyling the Rule) says: “A party claiming damages or other monetary relief
must, in addition to disclosing the calculation of such damages, make available the
supporting documents for inspection and copying . . . .” Fed. R. Civ. P. 26 advisory
committee’s note to 1993 amendment (emphasis added). It therefore appears to require
disclosure of calculations for equitable remedies providing monetary relief. On the other
hand, the last sentence of that paragraph in the 1993 note states: “Likewise, a party
would not be expected to provide a calculation of damages which, as in many patent
infringement actions, depends on information in the possession of another party or
person.” Id. As with disgorgement here, the recovery sought in a patent-infringement
action may be based on the defendant’s income (rather than the injury to the plaintiff); so
the sentence certainly supports the district court’s decision, although on a slightly
different ground—the fact that the information necessary to calculate the monetary relief
is in the hands of the defendant.
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]
23 received from any source as a result of their conduct in furtherance of the abusive solar
energy scheme[.]” United States’ Initial Disclosures to All Defs., Ex. 1 to Defs.’ Reply
Mem. in Supp. of Mot. in Lim. to Exclude Test. Regarding Damages Relating to
Disgorgement of Funds at 7, Mar. 13, 2018, ECF No. 337-1. It further stated that the
information then in its possession showed that Defendant Shepard earned $170,000 from
the scheme over the course of four years and that Defendant Johnson had earned nearly
$500,000 over the course of two years. And it added that the government “expect[ed] the
disgorgement calculation to increase as additional information is produced with respect to
the gross receipts each defendant received relating to the abusive tax scheme.” Id. at 8.
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
24 multiplied by the $1,050 down payment for each lens. It reported that, “[a]ccording to
Defendants’ own records (which are likely incomplete), Defendants have sold at least
45,201 lenses,” so that $47,461,050 should be frozen. Id. at 13.
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.
25 2. Expert Witnesses
Federal Rule of Civil Procedure 26(a)(2) requires a party to disclose witnesses
who may give expert testimony and, in certain circumstances, provide a report by the
expert. Defendants argue that various testimony by government witnesses should not
have been admitted because the government had failed to disclose the witnesses as
experts before they testified. The challenged testimony related to the amount of deposits
into Defendants’ bank accounts, the amount of gross receipts based on lens sales
multiplied by down payments, and the estimated harm to the Treasury based on tax
benefits claimed multiplied by an assumed tax rate. The district court determined that the
government’s witnesses were not offering expert testimony, so the government was not
required to identify them as experts or produce expert-witness reports. The district court
was correct.
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
26 average tax rate by the sum of the deduction and credit amounts claimed by a sample of
RaPower customers. Because these “mathematical calculation[s] [were] well within the
ability of anyone with a grade-school education,” Bryant, 432 F.3d at 1124, it was not an
abuse of discretion to admit their testimony.
IV. CONCLUSION
We AFFIRM the judgment below.