Print
Category: News

Salt Lake City, Utah - A federal court in Salt Lake City, Utah, ordered R. Gregory Shepard and Neldon Johnson and Utah companies RaPower-3 LLC, and International Automated Systems, Inc., to disgorge over $50 million in gross receipts from facilitating and promoting an abusive tax scheme involving false tax deductions and solar energy credits.

The court also barred defendants from promoting and marketing the scheme and ordered them to take steps to ensure that the public is not further harmed by their actions.

“We are gratified by the court’s decision, which mitigates the harm to the United States Treasury caused by defendants’ unlawful tax scheme,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.  “As the court’s decision recognizes, a business model that is based on false and fraudulent conduct cannot be allowed to retain its income.”  

Based upon evidence the government submitted to the court during a 12-day bench trial, the court found that the defendants engaged in a “massive fraud.” The court stated that the defendants “each knew, or had reason to know, that their statements about the tax benefits purportedly related to buying solar lenses were false or fraudulent.”

The court stated that “[b]ecause of the manner in which Defendants promoted the scheme, the court concludes that $50,025,480 in gross receipts from the solar energy scheme came from money that rightfully belonged to the U.S. Treasury.” The court found that the defendants “obstructed discovery about their gross receipts and other topics involving their finances.”

The court stated that the United States showed a “reasonable approximation” of the total gross receipts from lens sales. In addition, the court held that defendants would not be allowed any credit of operating expenses because such credits “are not consistent with principles of equitable disgorgement.”

According to the opinion, defendant Neldon Johnson claimed to have invented purported solar energy technology involving solar thermal lenses placed in arrays on towers. The court found that to “make money from this purported solar energy technology, Johnson decided to sell a component of the purported technology: the solar lenses.”

Under the proper circumstances, the Internal Revenue Code allows a taxpayer engaged in a trade or business certain tax deductions for expenses the taxpayer incurs while generating income. Likewise, if all of the requirements are met, the tax law allows an “energy credit” for certain “energy property.”

However, in this case, the court concluded that the defendants “knew, or had reason to know, that their customers were not in a trade or business of leasing out solar lenses and, therefore, that their customers were not allowed the depreciation deduction or solar energy tax credit.”

The opinion also concluded that the defendants made “gross valuation overstatements” when they sold lenses to customers. The court found that the defendants sold each lens for a total purported price of $3,500. The court stated that the evidence showed that the raw cost of each supposed “lens” was very low and found that “[d]efendants’ technology does not work, and is not likely to work to produce commercially viable electricity or solar process heat. Therefore, each ‘lens’ is just one component of an inoperable system. It is not a piece of sophisticated technology such that premium pricing is appropriate for it.”

The court also barred defendants from promoting and marketing the scheme. The court stated that the defendants sold lenses using a multi-level marketing approach, and encouraged distributors to “bring still more people in to the multi-level marketing system and build an extensive ‘downline.’” The court concluded that, in this case, “[t]he toxic combination of multi-level marketing and misleading information creates an urgent need [for] an injunction.” 

The injunction requires, among other things, that the defendants stop making statements that a person who buys a lens is in a trade or business with respect to that lens; may lawfully claim a depreciation deduction or any other business expense deduction related to a solar lens; and may lawfully claim a solar energy credit related to a lens.

Further, the court ordered that the defendants disclose, in their marketing materials for lenses that the court “has determined that the solar energy technology of RaPower-3 in place from 2005 to 2018 is without scientific validation or substance and ineligible for tax credits or depreciation by individual purchasers of lenses.”

Principal Deputy Assistant Attorney General Zuckerman thanked Trial Attorneys Erin Healy Gallagher, Erin R. Hines, and Christopher R. Moran who litigated the case. He also thanked the many IRS attorneys and agents who participated in the investigation.