United States v. Rapower-3, LLC

• Decision Date: 04 October 2018
• Docket Number: Case No. 2:15-cv-00828 DN
• Citation: 343 F.Supp.3d 1115
• Parties: UNITED STATES of America, Plaintiff, v. RAPOWER-3, LLC, International Automated Systems, Inc., LTB1, LLC, R. Gregory Shepard, and Neldon Johnson Defendants.
• Court: U.S. District Court — District of Utah

343 F.Supp.3d 1115

UNITED STATES of America, Plaintiff,

v.RAPOWER-3, LLC, International Automated Systems, Inc., LTB1, LLC, R. Gregory Shepard, and Neldon Johnson Defendants.

Case No. 2:15-cv-00828 DN

United States District Court, D. Utah, Central Division.

Signed October 4, 2018

Erin Healy Gallagher, Pro Hac Vice, Erin R. Hines, Pro Hac Vice, Christopher R. Moran, Pro Hac Vice, Us Department of Justice, Washington, DC, John K. Mangum, US Attorney'S Office, Salt Lake City, UT, for Plaintiff.

David E. Leta, Jeffrey D. Tuttle, Snell & Wilmer LLP, Salt Lake City, UT, Denver C. Snuffer, Jr., Daniel B. Garriott, Joshua D. Egan, Steven R. Paul, Nelson Snuffer Dahle & Poulsen, Sandy, UT, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

David Nuffer, United States District Judge

OVERVIEW

This case was tried over 12 days in April and June 2018.¹ The United States presented testimony from 25 witnesses, both live and via deposition designation. Defendants rested their case without calling a single witness, but they thoroughly examined each witness called by the United States, including Defendants Neldon Johnson and R. Gregory Shepard. Defendants' thorough cross examination of Shepard and Johnson² did not lend any credibility to their case. More than 650 exhibits were received into evidence.³ On June 22, 2018, immediately after closing arguments, partial findings of fact were delivered from the bench, concluding that Defendants engaged in a "massive fraud" for which they would be enjoined and disgorgement would be ordered.⁴ An interim order of injunction issued requiring that, no later than June 29, Defendants (1) post a notice on their websites that this Court found tax information Defendants provided was false and (2) remove tax information from their websites.⁵ As requested, the United States submitted draft findings of fact and conclusions of law before trial, as did Defendants. Then, following trial, revisions and additional findings were delivered to the parties. The United States submitted revised draft findings of fact and conclusions of law,⁶ and Defendants objected.⁷ After careful consideration of all this testimony, evidence,] submissions and materials, these final Findings of Fact and Conclusions of Law are filed.

Table of Contents

I. Introduction...1123

II. Findings of Fact...1123

A. Defendants organized (or assisted in the organization of) a plan or arrangement, and participated (directly or indirectly) in the sale of an interest in the plan or arrangement...1123

1. Neldon Johnson...1123

2. R. Gregory Shepard...1127

3. Roger Freeborn...1129

4. Orders Placed by Customers...1130

5. Receipts by Lens-Selling Entities...1131

6. Receipts by Johnson and Shepard...1132

7. The Role of Tax Return Preparers Selected by Defendants...1132

8. Defendants' Roles in Tax Audits of Customers...1133

9. Post-Litigation Conduct...1134

B. In connection with organizing or selling any interest in a plan or arrangement, Defendants made or furnished (or caused another person to make or furnish) statements regarding the allowability of any deduction or credit because of participating in the plan or arrangement...1134

1. Defendants told customers, and prospective customers, about the structure of the transactions...1135

2. Defendants told customers, and prospective customers, about Johnson's purported solar energy technology...1139

3. Defendants sold solar lenses by emphasizing the purported tax benefits...1141

C. Defendants knew or had reason to know that their statements were false or fraudulent as to material matters...1147

1. Defendants knew, or had reason to know, that Johnson's purported solar energy technology did not work, and would not work to generate commercially viable electricity or other energy...1147

2. Defendants knew, or had reason to know, that the only way a customer has "made money" from buying a lens is from the purported tax benefits...1152

a. No customer has been paid rental income generated from the use of his lens to generate power bought by a third-party purchaser...1153

b. No customer has been paid a bonus...1157

3. Defendants knew, or had reason to know, that their customers are not required to pay the full down payment, much less the full purchase price for a lens...1157

4. Defendants knew, or had reason to know, that Johnson, and not their customers, controlled the customers' purported "solar lens leasing businesses."...1158

5. Defendants knew, or had reason to know, that their customers do not have special expertise or prior experience in the solar lens leasing business...1160

6. Defendants knew, or had reason to know, that advice from independent professionals did not support their claims about tax benefits...1160

7. Defendants knew, or had reason to know, that the IRS disallowed their customers' depreciation deductions and solar energy tax credits...1168

8. Defendants knew, or had reason to know, that the Oregon Tax Court rejected their customers' depreciation deductions and solar energy tax credits...1168

D. In connection with organizing or selling any interest in a plan or arrangement, Defendants made or furnished (or caused another person to make or furnish) gross valuation overstatements as to the value of the solar lenses...1169

E. The harm caused by Defendants' conduct is extensive...1169

III. Conclusions of Law...1170

A. Defendants organized, or assisted in organizing, the solar energy scheme, and sold solar lenses pursuant to the scheme...1170

B. While promoting the solar energy scheme, Defendants made or furnished (or caused others to make or furnish) statements about the allowability of a depreciation deduction and a solar energy tax credit as a result of buying solar lenses, which statements Defendants knew or had reason to know were false or fraudulent...1171

1. Defendants knew, or had reason to know, that their customers were not allowed a depreciation deduction or the solar energy credit because customers were not in a "trade or business" related to the solar lenses and did not hold the lenses for the production of income...1173

a. Defendants knew, or had reason to know, that their customers were not in a "trade or business" related to the solar lenses and did not buy lenses for the production of income...1173

b. Defendants knew, or had reason to know, that their customers were not allowed a depreciation deduction...1182

c. Defendants knew, or had reason to know, that their customers were not allowed the solar energy credit...1184

2. Defendants knew, or had reason to know, that their customers were not allowed to deduct their purported expenses related to the solar lenses against their active income or use the credit to reduce their tax liability on active income...1185

3. Defendants knew, or had reason to know, that that the full "purchase" price of the lenses was not at risk in the year a customer signed transaction documents...1187

4. Defendants knew, or had reason to know, that all of their statements were false or fraudulent in spite of the legal advice upon which they claim reliance...1189

C. While promoting the solar energy scheme, Defendants made or furnished (or caused others to make or furnish) gross valuation overstatements as to the value of the solar lenses...1190

D. An injunction and other equitable relief are necessary and appropriate to enforce the internal revenue laws of the United States...1192

ORDER...1197

I. Introduction

For more than ten years, Defendants Neldon Johnson, RaPower-3, LLC, International Automated Systems, Inc. ("IAS"), LTB1, LLC ("LTB"), R. Gregory Shepard, and Roger Freeborn⁸ have promoted an abusive tax scheme centered on purported solar energy technology featuring "solar lenses" (called, herein, the "solar energy scheme") to customers across the United States. The evidence shows, however, that the solar lenses were only the cover story for what Defendants were actually selling: unlawful tax deductions and credits. Defendants have repeatedly engaged in conduct subject to penalty under the Internal Revenue Code.⁹ Defendants' conduct has caused serious harm to the United States Treasury and the system of honest and voluntary tax compliance. Defendants received more than $50 million dollars from the solar energy scheme at the expense of the United States Treasury. Defendants will be enjoined from promoting their abusive solar energy scheme and ordered to disgorge their gross receipts to mitigate the harm their conduct caused the Treasury.¹⁰

II. Findings of Fact

A. Defendants organized (or assisted in the organization of) a plan or arrangement, and participated (directly or indirectly) in the sale of an interest in the plan or arrangement.¹¹

1. Neldon Johnson

1. Neldon Johnson is and has been the manager, and a direct and indirect owner of, RaPower-3, LLC, International Automated Systems, Inc., and LTB1, LLC (among other entities). He is the sole decision-maker for each entity.¹²

2. Johnson claims to have invented certain solar energy technology.¹³

3. Johnson's purported solar energy technology involves solar thermal lenses placed in arrays on towers.¹⁴

4. His idea is that the lens arrays will track the sun as it moves across the sky during the day.¹⁵

5. His idea is that radiation from the sun would hit the lens, which would then bend and intensify the radiation in a specific point called a "solar image."¹⁶

6. His idea is that the solar image would hit a receiver which would be suspended underneath the lenses.¹⁷

7. Groups of 32 lenses grouped in a circular shape are attached to one receiver in his current design. Four of these collectors are attached to a single pole.

8. Many poles with receivers installed have no collector or mechanism to transmit energy from a receiver to a generator.

9. The site in Delta Utah currently has approximately 90 towers.

10. The beam of concentrated light would then heat a heat transfer fluid in the receiver.¹⁸

11. The heat transfer fluid – oil, molten salt, water, or another heat transfer fluid – Johnson has not decided, to date, which to use¹⁹ – would then be pumped to a...