SALT LAKE CITY — As the federal case against three men and a trio of companies involved in an alleged "solar energy scheme" in Utah and the West continues to progress, the U.S. Department of Justice said it has identified 90 customers who claimed bogus tax credits and the agency expects to find more.
A planning meeting among attorneys involved in the federal court case against RaPower3, International Automated Systems, LTB1, Gregory Shepard, Neldon Johnson and Roger Freeborn was held this month, with indications a trial could be held in June 2018.
The U.S. Department of Justice sought an injunction against the companies and the men last fall, asking the federal court to shut down the multi-level marketing business involving solar lenses that are "purchased" and then alternately leased to reduce income liability with the IRS.
The government, in its filing, claims the lenses are indeed nothing more than thin sheets of plastic that have been exposed to desert conditions in Millard County and either have fallen to the ground or hang dangling or broken from installed towers.
Federal agencies said the "sham" operation has cost the U.S. Department of the Treasury more than $4 million in a bevy of tax cases that are unfolding in courts throughout Utah, Oregon, California, Washington and other states.
"The United States contends that neither the defendants nor their customers are engaged in a solar energy business that makes them eligible to claim tax credits or business expenses such as depreciation," federal attorneys said in court documents.
"Additionally, the United States contends that the transactions lack economic substance and their only purpose is to improperly reduce customers' federal tax liabilities while enriching the defendants with funds from the United States treasury."
In the federal complaint filed last November, the U.S. government asserted the defendants were using a "purported" solar energy facility in Millard County to promote a "revolutionary" approach to capturing and using solar energy.
The defendants deny the allegations brought by the federal government and assert they have been involved in a legitimate business. Moreover, they say — in documents filed before the court — any representations they made regarding tax implications are grounded in "fact and law."
"The fact that the government incentivizes alternative energy transactions by means of tax credits and deductions does not make the defendant's business a 'scheme," the defendants said in court documents.
Johnson also wrote an open letter to the IRS, posted on the RaPower3 website, indicating that it might be difficult for the agency to understand "what they could accomplish," through the International Automated Systems development of concentrated solar energy. The company also refuted the specific claims against it made by the federal government.
But federal tax attorneys say RaPower3 was selling solar thermal lenses using technology Johnson purportedly invented for $3,500 a lens, with $1,050 due as a down payment. Only $105 was due at purchase, with another $945 due when the customer received the federal tax savings, according to the court.
The equipment would be leased to LTB1 out of Nevada, with the rest of the balance financed over 30 to 35 years at 1 percent interest, documents said.
"In effect, the defendants are using tax incentives authorized by Congress to transfer funds from the U.S. treasury to themselves," federal tax attorneys allege in court documents.
Customers can choose to become sponsors, recruiting new members to "buy into the scheme," according to the government, in exchange for a commission.
One Oregon case involved a man who claimed $21,000 in net loss from depreciation in 2010 for a solar energy system he said he purchased from RaPower3, according to records in Oregon Tax Court's Magistrate Division. The man testified he never visited Utah, never saw the nine lenses he purchased, and is unsure if they were placed in service. According to the court, the man acknowledged they could remain in storage in a Utah warehouse.
In the October 14 trial in Salem, the court said there was no evidence the lenses were ever manufactured and ruled he failed to establish the depreciation loss.
"Frankly, the court is not certain whether plaintiffs were involved in a purchase, or rather some sort of sophisticated marketing investment scheme," the court said.
The government is seeking an injunction to stop the marketing of the alleged scheme, which court documents say is promoted via email, the Internet, various forms of social media and correspondence sent to customers.
RaPower3, in fact, continues to promote the solar thermal lenses on its website, with a description that reads, "Technology unlike you have ever seen before."
The court set an initial pretrial conference for late April and laid out a discovery plan, which includes a demand of gross revenues received by the defendants related to the sale of solar lenses and related technology. The government is seeking repayment of that money. Federal investigators also want to be able to visit the Millard County solar site, as well as any other site associated with the solar activities.
A call to attorney Sam Alba, who represents Johnson, International Automated Systems and RaPower3, was not returned Monday.
According to the documents, the defendants have requested a jury trial, which the Justice Department said they are not entitled to because of the nature of the case. A hearing on that issue is set for April 27.
The Deseret News was the first to report in December of 2013 the questionable business practices of International Automated System's decade-long practice of promising solar energy in arrangements that never came to fruition.
In a months-long investigation, the newspaper uncovered projects in multiple states that never produced energy, despite claims by company officials that the technology was revolutionary.
Before the solar thermal lenses the RaPower3 website said Johnson developed with assistance of Hubble Space Telescope scientists, there was a new communications system called Digital Wave Modulation, which Johnson, a Utah County resident, was promoting heavily from 1995-96.
A complaint by the U.S. Securities and Exchange Commission detailed that Johnson was behind the publication of eight separate news releases about Digital Wave Modulation disseminated 55 times and that he conducted a national news conference in Orem as well.
The news releases claimed, among other things, that the machine could transmit 1.8 billion bytes of information per second and network with up to 1,000 computers at a time, according to the SEC filing in federal court in Salt Lake City.
During the 12-month period the news releases were going out, the SEC noted that stock of International Automated Systems rose from $3.50 a share to $40 a share.
The claims of Digital Wave Modulation's abilities were simulated on a computer, and Johnson never "physically" built a machine or an operational prototype, the SEC said.
The federal agency brought a civil action of securities fraud in 1998 against Neldon Johnson and International Automated Systems, a case that was ultimately settled in 2005 with an order issued by U.S. District Judge Dee Benson.
Johnson was allowed to settle the case with the SEC absent an admission of guilt. A payment of $1.3 million in profits gained from the alleged activity and $1.2 million in interest, which Johnson was ordered to pay to the court, was waived because of Johnson's sworn statement of his financial assets, according to the judgment.