United States v. Rapower-3, LLC (343 F. Supp. 3d 1115, 2018)

David Nuffer, United States District Judge

OVERVIEW

This case was tried over 12 days in April and June 2018. 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 Johnson did not lend any credibility to their case. More than 650 exhibits were received into evidence. 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. 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. 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, and Defendants objected. 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 Freeborn 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. 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.

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.

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.

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

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

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

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."

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

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.

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

12. The heat exchanger would use the heat to boil water and create steam.

13. Johnson's idea is that the steam would turn a turbine, which would generate electricity.

14. His idea is that the electricity would then be sent onto electric wires.

15. The wires would be connected to the electrical grid.

16. Once the lenses were installed and "started up," the "operation and maintenance" of the lenses would be turned over to a company called LTB, LLC.

17. LTB, LLC, is another entity that Johnson created and controls.

18. According to Johnson, LTB would maintain and operate the lenses and "market the power generated by the solar units."

19. LTB would pay lens owners an annual payment of $150 "[o]nce the Owner's Alternative Energy System(s) are installed and producing revenue."

20. Johnson illustrated this idea as early as 2006 as follows:

21. Johnson took some college classes in the sciences and engineering in or before 1975 but does not have a college degree in any subject.

22. Neither Johnson, nor anyone else connected with him or one of his entities, has ever operated or maintained a solar energy power plant of any kind.

23. In or around 2006 through 2008, Johnson directed IAS to erect, at most, 19 towers on "the R & D Site" near Delta, Utah, in Millard County.

24. Johnson also directed that IAS install solar lenses in those towers.

25. To date, those are the only towers that Johnson has built, and the only lenses that he has had installed.

26. Johnson promotes this purported solar energy technology through the IAS website, radio spots, and social media.

27. To make money from this purported solar energy technology, Johnson decided to sell a component of the purported technology: the solar lenses.

28. Johnson recognized that his strength was not in sales, so he directed that IAS use independent sales representatives to sell lenses.

29. He also created a bonus incentive program for people who bought lenses, to spread the word about the solar lenses and sell them to more and more people.

30. Johnson decided that the bonus program would be a cheaper and more effective way to sell lenses than doing conventional advertising.

31. Johnson drafted some promotional materials to describe this arrangement, "IAUS Solar Unit Purchase Overview" and IAS "Solar Equipment Purchase."

32. Johnson showed IAS salespeople these descriptive materials about the structure of the transaction, the purported technology, and the federal tax benefits that Johnson said a customer could lawfully claim when he bought a lens from IAS.

33. He told IAS's initial salespeople what he understood the tax laws to mean.

2. R. Gregory Shepard

34. R. Gregory Shepard's role was not in inventing the technology, but rather the marketing, sales and disseminating false information regarding the availability of tax benefits to customers.

35. Shepard has been an IAS shareholder since the mid-1990s. He became one of IAS's initial salespeople in or around September 2005, and began selling solar lenses.

36. IAS paid Shepard (and its other salespeople) a commission of 10 percent of the money generated from his sales.

37. Shepard's professional background, before becoming involved with the solar energy scheme, was in sports performance as a coach and trainer.

38. Shepard's information about Johnson's purported solar energy technology came from Johnson or members of Johnson's family, and Shepard's own observations on his site visits over the years.

39. Johnson told Shepard that a depreciation deduction and the solar energy tax credit are related to the sale of lenses.

40. Shepard never questioned how Johnson determined that purchasers of solar lenses were purportedly eligible for a depreciation deduction and the solar energy tax credit.

41. Johnson created, owns, and controls at least three entities that sell or have sold solar lenses: SOLCO I, XSun Energy, and RaPower-3, LLC.

42. Johnson created RaPower-3 in 2010. He is its manager and the sole decision-maker for the company.

43. Once formed, RaPower-3, not IAS, sold solar lenses to individuals.

44. RaPower-3's only business activity is selling solar lenses through a multi-level marketing (otherwise known as "network marketing") approach to increase sales.

45. If a person wants to sell solar lenses through RaPower-3, that person need only sign up to become a "distributor."

46. RaPower-3 encourages distributors to bring still more people in to the multi-level marketing system and build an extensive "downline."

47. RaPower-3 pays its distributors as much as 10 percent commission on lens sales in each distributor's respective downline.

48. Johnson directed RaPower-3 to create a site online (https://rapower3.net) where a customer can access and sign a contract to buy lenses and sign other transaction documents that Johnson provides (described below).

49. Changing from a direct-sales model through IAS to an internet-ready, multi-level marketing model through RaPower-3 led to "[h]undreds of people across the nation purchas[ing] solar lenses."

50. Selling lenses through RaPower-3 gave Johnson "much needed revenue" to continue his operations.

51. When Johnson started RaPower-3, Shepard transitioned from being an IAS salesperson to a RaPower-3 distributor.

52. Shepard considers himself and other distributors in the RaPower-3 system as "team members."

53. But Shepard, who gave himself the title "Chief Director of Operations" for RaPower-3 to sell more lenses, is the team member "at the top."

54. Among other things, Shepard created the website www.rapower3.com and moderates an online discussion board called "IAUS & RaPower[-]3 Forum."

55. Shepard gets paid for his work promoting RaPower-3 through his company, Shepard Global.

56. On the RaPower-3 website, Shepard describes the technology and the transactions underpinning the solar energy scheme, promotes sales, and provides links to the site with the transaction documents.

57. Shepard uses the Forum to communicate with people who have already bought lenses and who own IAS stock.

58. Shepard also organizes groups of people to visit the R & D Site, the site where component parts of the purported solar technology system are manufactured (the "Manufacturing Facility"), and the site on a large field with a few semi-constructed component parts (the "Construction Site").

59. He organized at least one "RaPower[-]3 National Convention" in 2012, at which Johnson spoke.

60. When other RaPower-3 distributors have issues or questions, they look to Shepard for guidance and advice, and to be the conduit to Johnson.

3. Roger Freeborn

61. Shepard told Roger Freeborn about RaPower-3, asked Freeborn if he wanted to buy lenses, and brought Freeborn into his multi-level marketing downline.

62. The two men knew each other through a company Shepard used to own, Bigger, Faster, Stronger ("BFS"). BFS sold athletic equipment and strength and conditioning programming primarily to high schools and middle schools around the country.

63. Freeborn was a teacher and football coach, and taught BFS clinics around the country.

64. When Freeborn started selling lenses for RaPower-3, at the end of a BFS clinic, he would "talk to the coaches about the possibility of creating a fundraising program to raise money for their sport" through the sale of RaPower-3 solar lenses.

65. Freeborn was a prolific salesman for RaPower-3, especially among the teachers and coaches that he reached through BFS's customer list.

66. Freeborn called himself the "National Director" of RaPower-3.

67. Freeborn's information about IAS, RaPower-3, the transactions and the technology underpinning the solar energy scheme, and the tax benefits purportedly associated with buying lenses came from Johnson, Shepard, and Freeborn's own observations on his site visits.

68. Freeborn used marketing materials that Shepard sent him and created his own to send or present to customers.

69. Freeborn also organized webinars for people to hear from him and Shepard about RaPower-3. He spoke at the 2012 "National Convention" that Shepard organized.

70. Because Freeborn lacked a background in federal tax, Freeborn relied on Johnson's assurance that Johnson would pay his attorneys' fees if he ever ran into trouble because of RaPower-3.

71. At Johnson's direction, Shepard fired Freeborn from RaPower-3 in June 2013.

72. Freeborn continued, however, to collect commissions on solar lens sales through his downline through at least the end of 2016.

73. IAS or RaPower-3 paid Freeborn more than $230,000 in commissions for his sales of solar lenses and sales of solar lenses in his downline.

74. Freeborn generated, through a "charitable foundation," approximately $75,000 more in commissions for lens sales.

4. Orders Placed by Customers

75. By careful derivation of data from a proprietary database (consisting of 18 MB of data, with 13 tables) maintained by defendants, Lamar Roulhac was able to extract data used in analysis of financial transactions. Extracted data was placed into three tabs in an Excel spreadsheet to which an analytical tab was added.

76. The extracted data in the Excel spreadsheet was totaled to show that the total sale price of orders placed with defendants by customers was between 50,025,480.00 to 50,097,672.15.

77. Many of those sale records show the word "full" in the comments field which would tend to show payment in full. The sum of those records is $17,911,507.

78. Some of those record comments show an export to QuickBooks. But no QuickBooks data file was provided by defendants.

79. Amanda Reinken testified that she made an analysis of data provided from defendants showing customers and lenses purchased and found that between 45,205 and 49,415 lenses had been purchased.

At the usual sales price of $3,500 each, this represents gross sales of between $158,217,500 and $172,952,500. At the stated down payment price of $1,050 each, this would represent revenue of $47,465,250 to $51,885,750. At the lowest possible payment level of $105 per lens, this would represent revenue of $4,746,525 to $5,188,575.

Lenses Price Gross sales Stated Revenue Lowest Revenue purchased per down down lens payment payment 45,205 $3,500 $158,217,500 $1,050 $47,465,250 $105 $4,746,525 49,415 $3,500 $172,952,500 $1,050 $51,885,750 $105 $5,188,575

Although there was some testimony that not all customers paid the full down payment, Defendants offered no credible evidence to show the amount by which these amounts could or should be reduced.

5. Receipts by Lens-Selling Entities

80. By extraction from 32,000 pages of bank records for accounts of all defendant entities other than LTB, Reinken extracted the total amount of deposits to the defendants' accounts.

81. From 2009 through early 2018, RaPower-3 received at least $25,874,066 from its role in the solar energy scheme.

82. From 2008 through 2016, IAS received at least $5,438,089 from its role in the solar energy scheme.

83. From 2011 through 2016, non-defendant XSun Energy received at least $1,126,888 from its role in the solar energy scheme.

84. From 2010 through 2016, non-defendant SOLCO I received at least $3,434,992 from its role in the solar energy scheme.

85. From 2005 through February 28, 2018, all lens-selling entities have received at least $32,796,196.

86. Testimony at trial showed that the total sales price of lenses which appears to have been paid is at least $50,025,480.

87. While Johnson testified that substantial sums were expended in his work on the solar energy project, these sums were spent from funds received only by reason of the deceptive information on tax benefits that Defendants provided, described below. Further, the expenditures were in aid of a solar energy production system that, as described below, had and has no reasonable possibility of success.

88. Much of these "substantial sums" were paid to Johnson and his family members or entities.

6. Receipts by Johnson and Shepard

89. From 2008 through 2016, Johnson, personally, received $623,449 from his role in the solar energy scheme. In 2012, the year the IRS began investigating the solar energy scheme, and since, direct payments to Johnson dropped to zero or near zero.

90. Johnson controls the flow of money among his entities and directs payments from their funds to himself and his immediate family members.

91. From 2006-2017, Shepard has received at least $702,001 either directly or through his entities, from his role in the solar energy scheme.

7. The Role of Tax Return Preparers Selected by Defendants

92. Shepard directs customers to use tax return preparers who are familiar with the Defendants' "solar energy" project and important to the solar energy scheme, like John Howell, in Wichita Falls, Texas; Kenneth Alexander in Florida; and Richard Jameson in St. George, Utah. They have prepared the majority of returns for RaPower-3 customers on which solar energy credits and depreciation were claimed.

93. Jameson testified at trial. His presence in the case demonstrates how Defendants rely on people with minimal qualifications, sophistication and expertise. Though the areas of science and law involved in Defendants' enterprise are complex, Defendants do not themselves have the expertise that would be expected in a legitimate enterprise of this complexity, and they do not associate with, employ or retain persons with expertise.

94. Jameson is an enrolled agent with the IRS with an office in St. George, Utah, who is not a CPA, has no degree in accounting, has a masters of science in taxation, and has worked at H & R Block, a tax preparation service.

95. Jameson prepared tax returns for clients based on his review of documents such as the Equipment Purchase Agreement, O & M Agreement, and placed in service letter, and proof of the client's payment for lenses.

96. The number of tax returns Jameson prepared for RaPower-3 customers increased every year from 2012 to the present.

97. Jameson wrote a letter to the IRS for a client stating "As a matter of fact, I have been to the site and have seen the home that is currently being powered by the lenses in the testing of the units. Attached are pictures of the home that I took on site when I was there." However, Jameson admitted he had no idea if the home was actually powered by solar energy or if his client's lenses were installed at that time. Jameson relied on "placed in service" letters as his sole evidence that the client's lenses were used.

98. While he did not see generation of electricity, he was told that the house on site was powered by the project components.

99. Jameson wrote another letter to the IRS for a different client stating that the lenses produce heat that "can be used to heat a building, a greenhouse, to produce clean drinking water and yes steam to drive a turbine that would product [sic] power." But he did not know if the client's lenses did any of these things.

100. Jameson never asked Johnson who would pay for electricity, heat, or water generated by solar lenses, and did not see heat captured by solar lenses used in any way other than to burn a piece of wood or make "a hole in the ground that would, you know, fry things. It was pretty hot."

101. Jameson never asked Shepard who would pay for electricity, heat, or water generated by solar lenses.

102. Jameson recommended that he prepare a draft tax return for a person so that the person could see the potential tax liability so the person could decide whether to make a RaPower-3 purchase.

103. Jameson attached the letters from Kirton McConkie and The Anderson Law Center (described below) to letters sent to materials he sent to IRS auditors "to establish the basis for a request for abatement [of] penalties under reasonable cause because this information was provided to the clients and they didn't know any better."

104. Though Jameson was aware that LTB was not acting as a lessee on lenses at the time, Jameson testified under oath in the Oregon Tax Court that he visited the LTB facility.

105. While Jameson is aware the Oregon Tax Court has ruled against his clients, his opinion has not changed.

106. His hostility toward the IRS was evident during his testimony.

107. Jameson's memory and credibility were shown to be deficient in his testimony by his demeanor and by specific instances of contradictions with his deposition.

8. Defendants' Roles in Tax Audits of Customers

108. Defendants' customers have been audited by the IRS for claiming the tax benefits Defendants promote.

109. When a customer notifies Shepard that they are under audit, Shepard typically directs the customer to Enrolled Agents John Howell or Richard Jameson to represent the customer before the IRS. Howell and Jameson represent RaPower-3 customers using the same arguments that Defendants make.

110. Shepard has also advocated for customers under audit before the IRS. He has given customers arguments to make before the IRS and documents to submit while under audit.

111. Johnson is paying the attorneys' fees for all customers whose tax benefits have been disallowed on appeal by the IRS and who have filed petitions in Tax Court.

9. Post-Litigation Conduct

112. The United States filed this injunction case in November 2015.

113. Johnson is paying for Shepard's and Freeborn's attorneys' fees to defend this case.

114. To date, Johnson, Shepard, IAS, and RaPower-3 continue to organize sales of solar lenses, and participate (directly or indirectly) in the sale of solar lenses.

115. They are not deterred from promoting the scheme, not by the IRS' disallowance of their audited customers' depreciation deductions and solar energy tax credits or by the complaint filed in this case.

116. Shepard testified that the only change in his behavior since the United States filed this case is that he "bowed [his] back and [is] fighting harder."

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.

117. While they sold solar lenses, and organized efforts to sell solar lenses, Defendants told their customers that, if they bought a solar lens and signed the transaction documents Defendants provide, their customers were in the "trade or business" of "leasing" solar lenses.

118. According to Defendants, because their customers are in the trade or business of leasing solar lenses, their customers are allowed to claim on their federal income tax returns a business tax deduction for depreciation on the solar lenses and a solar energy tax credit.

119. According to Defendants, one of the reasons their customers may claim these tax benefits is that their customers "materially participated" in their purported solar lens leasing business.

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

120. The structure and pricing of the transactions that purportedly create the customers' solar lens leasing business have changed over time.

121. As early as 2005, Johnson directed that IAS "lease" the solar lenses to customers.

122. Customers paid $9,000 for leasing the lenses from IAS.

123. Shepard leased lenses from IAS in 2005.

124. According to the lease agreement, IAS would build solar towers and install the customers' lenses at a specific site - in the case of Shepard's lenses, Yermo, California.

125. At the same time a customer leased the lenses from IAS, he signed a sublease agreement with LTB.

126. The idea was that, once IAS had installed (for example) Shepard's lenses in Yermo, California, LTB would take over operation and maintenance of Shepard's lenses to generate revenue for Shepard.

127. Shepard's lease agreement states that IAS will provide him "plans, specifications and other documentation and engineering as required to obtain approval" to operate the lenses from "local state and federal agencies" at an "undetermined" time.

128. IAS set benchmarks for additional approvals and for installation of Shepard's lenses based on that "undetermined" date for plans.

129. In 2006, Johnson changed the transaction's structure. Instead of a customer leasing lenses from IAS, the customer would buy lenses.

130. At that time, the total price for a lens was $30,000, but the customer paid only $9,000 in down payment."

131. IAS financed the remaining $21,000, interest free.

132. According to the 2006 contract, the $21,000 would be paid by the customer in $700 annual payments over 30 years.

133. But the obligation to start paying $700 annually would only begin five years after IAS installed and began operating the customer's lens at a specific "Installation Site" in Delta, Utah.

134. Shepard's contract, which he signed on December 22, 2006, required IAS to install and "startup" his lenses within seven days: on or before December 29, 2006.

135. According to the contract, if IAS failed to "furnish, deliver, install and startup" the lenses by December 31, 2007, it would refund the Shepard's down payment of $9,000.

136. IAS continued to sell lenses with, generally, the same or similar transaction terms through 2009.

137. Freeborn bought his first lenses from IAS under these terms in August 2009.

138. With the transition to RaPower-3 in 2010, Johnson changed the price of a lens to $3,500.

139. Customers also started purchasing lenses via the internet at rapower3.net.

140. On that site, a potential customer enters the number of lenses he wishes to purchase, and the website "figures" the amount the customer owes and the amount of the customer's down payment.

141. The site also provides all transaction documents for customers to sign electronically: an Equipment Purchase Agreement, an Operations & Maintenance Agreement ("O & M"), and, at times in the past, a bonus contract.

142. Customers do not negotiate the price of a lens, or other terms of the transactions Defendants promote. The lack of price negotiation is because the customer is not focused on buying a lens but on buying a tax benefit package. A high price results in large tax benefits. Testimony to the contrary from lens purchasers is not credible because they face serious tax consequences from the adjudication of the truth of this solar energy scheme.

143. The Equipment Purchase Agreement states the number of lenses the customer purportedly purchases from RaPower-3.

144. The contract states that RaPower-3 will install and "startup" the lenses the "Installation Site," which is "a site yet to be determined."

145. The Installation Site is "any place that Neldon [Johnson] wants it to be."

146. There is no date-certain in the Equipment Purchase Agreement by which the customer's lenses must be installed in a tower and producing revenue.

147. Instead, the "Installation Date" is defined as "the date the [lens] has been installed and begins to produce revenue."

148. RaPower-3 commits that each lens will sustain a specific "energy production rate" for the first five years from the "Installation Date."

149. If the lenses do not sustain the promised "energy production rate," the buyer may terminate the Equipment Purchase Agreement and is not obligated to pay any remaining balance for his lenses.

150. At the same time the customer electronically signs the Equipment Purchase Agreement, the customer electronically signs an Operation and Maintenance Agreement ("O & M") with LTB.

151. According to Defendants, by signing the O & M, the customer is "holding out for lease" his solar lenses to LTB.

152. The O & M states that once a customer's lenses are installed at a "Power Plant" on the "Installation Site" (defined only by reference to the Equipment Purchase Agreement), LTB will operate and maintain the customer's lenses to produce revenue.

153. According to the O & M, LTB is "entitled to receive all revenue" from sales, but will make a quarterly "rental payment" to the customer for using that customer's lens(es) to produce the energy it will sell.

154. In a single year, the total rental payments to any customer for a single lens may not exceed $150.

155. There is no date-certain in the O & M by which a customer's lenses are required to begin producing revenue.

156. Defendants told customers that IAS, RaPower-3, or LTB "placed in service" or "put into service" their solar lenses in the year that the customers purchase the lenses.

157. The Equipment Purchase Agreement states that the full price of a single lens is $3,500.

158. But a typical solar lens customer does not pay the full price upon signing the Equipment Purchase Agreement.

159. Instead, a customer pays for his lenses in the following stages.

160. First, he pays $105 per lens at the time he signs the Equipment Purchase Agreement, often near the end of the calendar year.

161. Second, he pays an additional $945 on or before June 30 of the following year, for a total of $1,050.

162. This leaves $2,450 remaining on the $3,500 lens purchase price.

163. The Equipment Purchase Agreement states that the customer will begin paying off the remaining $2,450 once the customer's lens has been installed and producing revenue for five years.

164. For the first five years of revenue production, the customer will receive $150 yearly rental payment per lens.

165. After the first five years, LTB will take the customer's $150 annual rental payment and divide it between the customer and RaPower-3: $82 per year for RaPower-3 to pay off the outstanding balance and $68 for the customer/lens owner.

166. LTB will make these payments for 30 years.

167. RaPower-3 provides nearly interest-free financing for the $2,450 debt remaining on each lens.

168. The only security for the customer's promise to pay is the lens itself.

169. Defendants do not check customers' credit.

170. At times, the Equipment Purchase Agreement has provided that, if the tax laws change after the date the customer signs the contract in a way that "materially reduce[s] any tax benefit" of the agreement to the customer, the customer may retroactively reduce the number of lenses he bought on the date of signing.

171. Also, if a solar lens customer no longer desires to "own" lenses, Johnson will refund the person's money and let them out of the contract.

172. From time to time in the past, a solar lens customer could also sign a "bonus referral contract."

173. The bonus contracts, over time, varied in the amount a customer could purportedly earn, and the basis for the customer's payout - either the first billion dollars in IAS gross sales or the second billion dollars in IAS gross sales.

174. If a customer signed a bonus contract before May 23, 2011, the bonus contract states that the customer will be paid a maximum of $6,000 per lens the customer bought based on a percentage of IAS's first billion dollars in gross sales.

175. If a customer signed a bonus contract between May 24, 2011 and February 29, 2012, the contract states that the customer will be paid a maximum of $2,000 per lens the customer bought during that time period based on a percentage of IAS's first billion dollars in gross sales.

176. If a customer purchased lenses and signed a bonus contract between March 1, 2012 and July 31, 2014, the contract states that the customer will be paid a maximum of $2,000 per lens the customer bought during that time period based on a percentage of IAS's second billion dollars in gross sales.

177. Defendants told customers that the bonus contract was the key to being able to claim a depreciation deduction related to the solar lenses because the promise of the bonus made the "system ... profitable in order to meet IRS requirements."

178. Johnson told a customer in 2010 that "[t]his bonus program makes certain that each purchase was made for an economic reason. This reason would be such that anyone would see the value of the transaction as to its economic values beyond just a tax savings."

179. But Johnson has not offered bonus contracts since July 2014.

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

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

181. Over the years, Shepard touted "[g]reat progress" having been made on component parts of the technology through "[e]laborate testing" and "research and development" of "technologies needing refinement".

182. Shepard and Freeborn also told customers and prospective customers to expect construction of new towers, beyond the 19 towers on the R & D Site.

183. As early as November 2006, Shepard said that IAS had "a goal of finishing 50 Solar Pods before the end of the year for those who were previously on the lease program.... For new investors, [IAS] has a goal to put up 50 additional Solar Pods before year's end."

184. Freeborn stated, in June 2010, "Neldon Johnson of IAUS and [R. Gregory] Shepard are hard at work bringing [the rental] income stream into operation. We are very close to making putting [sic ] everything together and becoming fully operational perhaps before the end of the summer."

185. Then, in February 2012, Freeborn told customers that "the IAUS energy fields are about to be erected."

186. In June 2012, Defendants told participants in the "RaPower[-]3 National Convention" about "what's been accomplished in the last year" with respect to research and development, manufacturing, and construction.

187. In July 2012, Shepard wrote to customers "[n]ow that the R & D is done and the Manufacturing Plant is completed along with the manufacturing of so many components is done [sic ], CONSTRUCTION WILL BEGIN THIS MONTH."

188. In November 2012, Shepard told a customer that there were "21,000 lenses in inventory" and "150 towers ready to install" with "$15M" in the bank."

189. In July 2013, Shepard told one customer "I THINK ALL 19 TOWERS ARE UP NOW. WE ARE JUST ABOUT READY TO FLIP THE SWITCH". But in August 2013, Shepard told customers being audited by the IRS that a photo attached to his email showed "the main tower. There will be 17 to 18 satellite towers that will feed the main tower's turbine and heat exchanger producing 1.5 megawatts of power."

190. In November 2013, Shepard told customers "[w]e are doing great down in Delta."

191. He identified one tower as "fully completed," "another ten satellite towers nearly completed," and an additional four towers "not yet complete."

192. Shepard told customers that "[t]hese fifteen towers will complete the first project. Probably in two weeks, the 2d project will begin. It will consist of 150 towers. All towers and trusses have already been delivered. All the lenses have been framed and many other components have already been made."

193. Shepard also told customers that "[t]he dual axis hydraulic tracking systems were working with the new Ram. The lenses heated up our molten salt storage container to over a thousand degrees."

194. As of June 2014, Shepard wrote to customers "[t]wenty-five construction workers will be employed to install twenty towers a day or close to two megawatts a day. To install that many towers/megawatts per day with only 25 workers is unprecedented in the history of energy construction. Target date to begin is before summer's end in 2014."

195. In December 2015, Shepard heard from a customer who was "a little worried about the amount of time that it is taking to get those lenses on towers and generating rental income."

196. Shepard assured the customer that "The extra time was getting the mass production and installation capabilities up to 25 towers a day. That has pretty much been completed. I'm pretty sure that the first quarter of 2016 will be a very good one for us. It will all work out."

197. When the customer asked if Shepard could say if he thought "the lenses will be on towers and generating rental income in 2016," Shepard responded "I very much think so!" 198. Defendants have also told customers about progress toward obtaining a contract to sell power to a third party purchaser.

199. In 2010, Johnson assured a customer that "[w]e do have power purchase agreements tentatively in place with other companies that have agreed to purchase the power produced from the solar energy equipment once the system is placed in service."

200. In August 2013, Shepard told customers that 18 or 19 towers would be producing 1.5 megawatts of power which would "soon be put on power poles going to Rocky Mountain Power which is Utah's largest utility company."

201. In April 2015, Shepard told customers that "we are now in the process of negotiating a [power purchase agreement] for the first set of towers that will be going up," such that rental income from their lenses could start soon.

202. Over the years, Shepard and Freeborn also told customers to expect bonus contract payouts "soon."

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

203. From the start, Defendants have told their customers that they can "zero out" their federal income tax liability by buying enough solar lenses and claiming both a depreciation deduction and solar energy tax credit for the lenses.

204. In the materials he wrote in 2006, Johnson included four pages on the tax benefits of buying a lens, due to depreciation and the solar energy tax credit.

205. Defendants tell customers to calculate both the deduction and the credit based on the full price of a lens, not the amount the customer actually pays.

206. Defendants also tell customers that they may use deductions related to solar lenses to offset the customers' active income, like W-2 wages from employment.

207. Johnson wrote that "[t]he person buying a [lens] receives a $9,000 tax credit from the IRS for each [lens] purchased.... The retail value of IAUS's [lens] is $30,000. The federal tax credit at 30% of $30,000 is $9,000."

208. Johnson connected the amount of depreciation a purchaser could take to the impact of the tax credit: "Half of the tax credit ($4,500) must be subtracted from the $30,000 purchase amount when using it to calculate depreciation of the equipment. Therefore, only $25,000 of the $30,000 value can be depreciated."

209. Johnson presented tables for purchasers who were in different tax brackets to illustrate the tax-reducing effect of buying lenses and claiming a depreciation deduction and the solar energy tax credit for them.

210. At the same time, Johnson told people they could :

211. Defendants also illustrated the tax benefits and flow of money this way:

212. Shepard offered a way for a prospective or returning customer to "determin[e] how many solar lenses you should buy": "look at the taxes you paid last year and what you expect to pay this year."

213. According to Shepard, the "objective" is to "zero out your taxes while maximizing your ability to bring clean, renewable energy to our country."

214. To accomplish this objective, Shepard gave prospective customers the formula to decide how many lenses to buy: take the customer's anticipated tax liability for the current year and multiply it by a number that "has been designed to give most taxpayers 1.5 times their money back in relation to their total down payment. For example, for a $10K down payment ... you may get back at least $15K in tax benefits."

215. Shepard showed customers and prospective customers how to calculate those tax benefits :

Example: Taxable 2014 Liability is projected to be $10.000 plus there was $10,000 paid In 2013 taxes (10,000 + 10.000 × 00085 = 17. Purchase Price: 17 systems × $3.500 = $59.500 Down Payment: 17 systems × $1.050 = $17,850 Tax Credit: $59,500 × 30% = $17.850 Depreciation (Net Operating Loss): One naif of the tax credit is $8.925 Subtract that from the purchase price of $59,500 = $50,575

216. Shepard showed the financial bottom line for a prospective lens buyer :

Money Details: 1. You purchased 9 systems and paid $9,450 as a down payment. 2. After your tax refund of $10,000 in 2014, you will have made $550 thanks to your RaPower3 purchase plus you will make about another $4,800 over the next four years. 3. Your profit is created by your depreciation. 4. Don't forget the rental income of $150 × 9 × five years = $6,750 and $68 × 9 × 30 years = $18,360 (for a total of $25,110).

217. Put more simply, Shepard showed customers exactly where and how, on a federal individual income tax return, to enter numbers to "zero out" their tax liability :

...

...

...

...

218. Shepard encouraged customers to sell lenses to others by emphasizing the tax benefits. He wrote, in one promotional document, "Remember, if your people are happy, meaning they received all their tax benefits, then they will purchase even more systems. That means you make commissions all over again.... Have your people make a copy of their refund check so the both of you can use it as a valuable tool in your presentations."

219. Freeborn told customers "you can be tax free like GE for 15 years" by buying lenses. Freeborn gave customers the following calculations :

Fourth, there are certain numbers that all RaPower3 team members need to have down per system: 1. Retail Price - $3500; 2. Full Down Payment - $1050; 3. Up Front/Enrollment Cost - $105; 4. Federal Energy Credit - $1050; 5. Bonus - $2,000; 6. Residual Income - $150/year first 5 years, $68/year the next 30 years; 7. Depreciation - $2,975, 50% Bonus depreciation the first year; 8. Rule of thumb - multiply Line 55 of From 1040 by 6, and then multiply that sum by .0007 to determine the number of systems to be purchased to offset federal income taxes through 2016. Remember, your client can always purchase more systems to extend his tax free status beyond 2016 since the tax credits may be forwarded 20 years.

220. Freeborn told people in his downline to start with the following pitch if they wanted to sell more lenses:

1. Listen for the tax return complaining conversations 2. Ask the MAGIC Question: "Do you like figuring (Paying) taxes?" 3. Explain to them your experience: "Well neither do I; that's why I DON'T pay any. Would you like to learn how not to as well?"

221. Shepard and Freeborn also assisted customers with preparing their federal income taxes to claim a depreciation deduction and solar energy tax credit as a result of buying solar lenses.

222. Shepard told people how to complete their tax returns "properly" to claim the tax benefits purportedly associated with buying solar lenses.

223. As Shepard told other RaPower-3 "leadership" team members in 2011, "I have someone from Florida that is FAXING his 1040 return to me. I told him that I can tell him in two minutes if his CPA did it right."

224. Shepard has corresponded with tax professionals to give them information and instruction about the transactions and the technology that purportedly qualify their customers for the tax benefits Defendants promote.

225. Shepard also advises customers under audit on how to respond to the IRS to defend disallowed and lens-related depreciation deductions and solar energy tax credits. Shepard advised customers not to answer the IRS's questions for information about the solar energy scheme.

226. RaPower-3 has touted "success stories" on its website. None of the "success stories" involved the actual production of solar energy.

227. Rather, all of the so-called "success stories" involved customers receiving the substantial tax benefits that Defendants promote.

228. Defendants have not changed their promotion in any appreciable way since 2005, with one exception.

229. In mid-2016, after this lawsuit was filed, Johnson changed the way RaPower-3 and Shepard promoted the tax benefits purportedly connected with solar lenses.

230. According to Shepard and Johnson, a customer may still buy lenses on the same terms described above, and claim depreciation and the solar energy tax credit.

231. But the customer may instead pay a lower price, not claim depreciation, and still claim the solar energy tax credit.

232. Customers are likely still claiming depreciation for lenses they bought after Johnson made this change.

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

233. 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.

234. This is because Defendants knew, or had reason to know, the following facts throughout the entire time they promoted the solar energy scheme:

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.

235. Johnson testified that he has "generated electricity" using lenses on the R & D Site a "hundred times," but no one other than him has seen it happen.

236. Johnson testified that he could have "put power on the grid" at "any time since 2005" and he "could have done that easily".

237. But Johnson testified that, since 2005, he has made a "business decision" not to put electricity on the grid.

238. Johnson also testified that every time he thinks he is finished and ready to connect to a third-party purchaser, he finds a problem, needs to create some new invention, or otherwise needs to make an improvement to his system. So he has never been finished.

239. Johnson has not produced data (for example, from testing the components alone or as a purported system), research, or third-party validation, to support his ideas of how he claims his system would work, or records of it working.

240. Johnson has no records of electricity production or of any other application of energy to a useful purpose.

241. In 2005, when he first began selling solar lenses, Shepard knew that IAS was "still a long ways away" from generating electricity for a third-party purchaser and that "more research and development had to be done ... to make the technology economically viable".

242. To date, Shepard has never seen the lenses in the towers at the R & D Site generate electricity. He testified at trial that he was "not sure that [he had] seen everything work right now simultaneously to produce electricity" and that "that "no solar lens is putting electricity on a grid."

243. Johnson has told Shepard that they have done so "for R & D purposes."

244. As of December 2013, Shepard advised customers that Defendants' "intention ... is to produce electricity." Nonetheless, as recently as February 19, 2016, Shepard admitted having "no proof that [the purported solar] towers are up and running."

245. Freeborn never saw the lenses in the towers that currently stand at the R & D Site generate electricity.

246. Nonetheless, Freeborn believed that because he saw lenses concentrate heat on an early site visit, he had "proof of concept" that they would be used in a system to generate electricity.

247. Freeborn thought that the other components of the system "would all be added later."

248. Freeborn testified that getting the "individual parts" of Johnson's purported technology to "work in concert ... seems to be the hurdle."

249. Johnson has no concrete plan to connect his purported solar energy technology to the electrical grid, such that a third party could purchase electricity generated.

250. There are extensive requirements Defendants must meet before "putting electricity on the grid," particularly through Rocky Mountain Power, a component of PacifiCorp.

251. PacifiCorp would require Defendants to obtain an "interconnection agreement," which would give Defendants permission physically connect their purported energy generating facility to PacifiCorp's equipment.

252. Defendants do not have an interconnection agreement with PacifiCorp.

253. As of April 2017, there was no grid connection to the IAS system to the power grid. Instead, there is a brown pole with wires dangling from the top. There is no transmission line or power substation near Defendants' site with sufficient capacity to carry the power Johnson claims his system can generate.

254. Johnson has never sold power to Rocky Mountain Power, the only power company in the area of the test site. No power purchase agreements have ever been signed with any end-user. This did not stop Johnson from telling a lens purchaser, in March 2010, that "we do have power purchase agreements tentatively in place with other companies that have agreed to purchase the power produced from the solar energy equipment once the system is placed in service."

255. The IAS website contains intentional misrepresentations about the laws obligating power producers to buy power from generators of renewable energy and the status of agreements between IAS and PacifiCorp/Rocky Mountain Power.

256. Dr. Thomas Mancini testified as the United States' expert witness on concentrating solar power ("CSP"). Dr. Mancini earned his Ph.D. in Mechanical Engineering from Colorado State University in 1975. For ten years thereafter, Dr. Mancini was a professor at New Mexico State University, where he taught courses on thermodynamics, heat transfer, fluid mechanics and solar energy. From January 1985 to July 2011, Dr. Mancini worked at Sandia National Laboratories, in Albuquerque, New Mexico. Among other job titles, Dr. Mancini was the CSP Program Manager at Sandia. Dr. Mancini has been consulting on solar energy projects since 2011 through his own business, TRMancini Solar Consulting. He engages in work similar to what he did at Sandia, reviewing system and component designs for concentrating solar energy projects and advising clients on the likely performance and costs of their proposed technology.

257. At the United States' request, Dr. Mancini reviewed the documents Defendants produced in this case and information on www.rapower3.com, along with information and documents provided by third parties. He reviewed patents Johnson has obtained. Dr. Mancini attended two site visits to view Defendants' purported solar energy technology, its components, and the places where Defendants manufacture and claim to use such components. During both visits, Dr. Mancini heard from Neldon Johnson about Johnson's purported solar energy technology and its components as he conducted Dr. Mancini around the sites.

258. Dr. Mancini credibly testified that Johnson's purported solar energy technology does not produce electricity or other useable energy from the sun.

259. Johnson's purported solar energy technology consists, and has always consisted, of separate component parts that do not fit together in a system that will operate effectively or efficiently. For example, there is no evidence the turbine will work in the system.

260. The solar lenses do not, either on their own or in conjunction with other components, use solar energy to generate marketable electricity. There is no evidence they ever have or ever will.

261. The solar lenses do not, either on their own or in conjunction with other components, use solar energy to heat or cool a structure. They never have and they never will.

262. The solar lenses do not, either on their own or in conjunction with other components, use solar energy to provide hot water for use in a structure. They never have and they never will.

263. The solar lenses do not, either on their own or in conjunction with other components, use solar energy to generate solar process heat. "Solar process heat" is heat from the sun that accomplishes some function or application, like heating potash to speed the process of turning it into fertilizer. Shepard testified that that the lenses produce heat and the only application that he heard of for that heat was to burn wood, grass, shoes, a man, and a rabbit. These are not examples of using heat from the sun for a useful application. The lenses never have been used to generate heat for some function or application, and they never will.

264. 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.

265. The project does not have the numbers of people with intellectual capacity in terms of training and background sufficient to produce or develop a commercial system. Johnson has no documentation of the credentials of any persons working on the project, except his own, which shows he has no degree. There is no evidence that anyone involved in the project has experience needed for the regulatory compliance required to place power on market.

266. Johnson's project has none of the documents which would be typical of a solar power project, including a detailed analysis of each of the components; computer models of the different components; computer models of a proposed system or multiple systems; tests that showed the performance of the individual components; systems tests that showed the actual power output solar energy input, what the issues were and identified; a complete suite of engineering drawings and component interface documents; documents reflecting how the project as a whole would conduct operations or be monitored during operations; a list of materials for all of the components and for the system itself; and the cost estimate of the components in the system. If a system was close to being operational, these documents would be in place.

267. Dr. Mancini's qualifications, his demeanor on the witness stand and answers during direct and cross examination, and the comprehensive fit of the whole of his testimony together show that he is credible and his conclusions and observations are reliable, without any significant exception or question.

268. Further, Defendants did not have a present a qualified to testify as an expert under Fed. R. Evid. 702 to rebut Dr. Mancini's testimony. They proffered Johnson, but he was excluded because his testimony was not based on sufficient (and verifiable) facts or data and was not the product of reliable and accepted principles and methods. There was insufficient proof that he reliably applied scientific or engineering principles and methods to the facts of this case.

269. Although Johnson has claimed to have received evaluations of his technology from people like the Dean of Electrical Engineering at Stanford University and other experts, Johnson could not identify any of them by name. Defendants offered no evidence from them.

270. The complete lack of third party verification of any of Johnson's designs, in light of the unconventional design of his systems, demonstrates that Johnson does not have the capability of designing a system that can produce usable products from solar energy, that his claims of capability are