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Utah solar lens scheme a 'massive fraud,' judge says

SALT LAKE CITY — A group of related companies involving the same pair of men in Utah can no longer say its solar lenses are eligible for energy tax credits after a federal judge issued a narrow injunction on Friday.

International Automated Systems, RaPower3 and Xsun Energy must pull any promotional material from the company websites if it purports tax benefits from lens purchases and also must post a notice from the U.S. District Court for Utah that any tax information on the solar lenses is false.

"The best evidence tells us there is $50 million in revenue with no productive results," said Judge David Nuffer after hearing closing arguments in a protracted trial.

"The numbers tell us this was a massive fraud to the customer and this was also a fraud on the American people who paid to operate this enterprise."

As the Deseret News was first to report in 2013, Neldon Johnson — head of International Automated Systems — has been claiming for more than a decade to be behind the development of revolutionary solar technology that, at the time, had yet to be linked to any significant energy production.

Through marketing, websites, tours and testimonials, Nuffer added that Greg Shepard with RaPower3 and Johnson created an "aura of success" for what he said ultimately was a doomed enterprise with technology that did not work, and would not work to generate any commercially viable electricity or other energy.

"It is a hoax funded by the American taxpayer by defendants' abusive advocacy of the tax laws," Nuffer said, adding, "This echoes the serious affinity fraud problem we have here in this state."

The judge will issue an expanded order that could include monetary liability imposed on the companies and the men, as well as additional restrictions regarding the lenses.

Defense attorney Denver Snuffer Jr. said his clients will appeal any court order. He had even sought dismissal of the case earlier this week.

He said the IRS is wrongly interpreting the tax code, creating an illusionary liability for his clients.

Nearly three years ago, the U.S. Department of Justice sought an injunction against Johnson, Shepard and the companies after an IRS investigation unraveled a complex scheme in which solar lenses were sold to thousands of people for a minimal down payment to claim a 30 percent federal production tax credit for a full price they didn't pay.

Customers bought the lenses for no other reason than to zero out their tax liability with the federal government and with the promise that once the lenses were producing energy, they would receive rental income, said Erin Healy Gallagher, tax attorney with the Department of Justice.

Although customers claimed the federal tax credits — which the government asserts cost the U.S. Treasury $50 million — the lenses were not eligible for the credit because they did not produce energy and were not actually placed in service, Gallagher said. There was never any rental income as well, she said.

She pointed out there were no power purchase agreements, PacifiCorp had never heard of the companies and there was no connection to the grid.

"All that we are left with is the defendants sold solar lenses. That's it," she said.

When defendants said the lenses created solar process heat, Gallagher said the defendants never identified what that solar process heat did, "other than to singe grasses or wood, or burn Greg Shepard's shoes or kill a poor bunny."

Once people purchased the lenses with a minimal down payment, Gallagher said taxpayers in many cases were directed to "pet" tax return preparers picked by the defendants who would guide them through the mechanics of claiming the credit.

Testimony from the trial revealed a review of 1,600 tax returns involving RaPower3 lenses over a three-year tax period that cost the treasury $14 million, she said.

"That's simply a snapshot."

Snuffer pointed out to the court on Friday that energy tax credit laws were explicitly written to foster innovation, experiments in technology and to advance research and development.

He said the IRS' definition of "placed in service" is that the product be placed in a condition or state of readiness and availability for a specially assigned function and that the threshold is "extremely low."

The lenses in a Delta warehouse or on poles in Millard County meet that definition, he said, because they were part of ongoing research and development in the production of concentrated solar heat.

"The government complaining about the lenses not producing electricity is like complaining a lettuce grower does not produce hamburgers," Snuffer said.

Although the IRS is not allowing RaPower3 customers to qualify for the tax credit, Snuffer said the agency is aggressive to the point of being wrong in 60 percent of the cases it brings. The disallowance, he added, "doesn't mean a thing."

"The government has not met its burden in this case of proving it was a tax scheme," he said, because there is no requirement to produce energy to get the credit.

But Gallagher said any research and development defendants claim is rooted in mystery.

"Any activity the defendants may claim as research and development, we call tinkering at best and fraud at worst," she said.

In the expanded order Nuffer will issue at a later date, it will cover the amount, if any, the defendants must return to the federal government and if the defendants' assets will be frozen.

Snuffer said the case should be dismissed.

"If you favor them, it is nothing more than tyranny," he said.

In issuing the injunction, Nuffer disagreed.

"Defendants have preyed on unsophisticated, small investors," he said. "Everyday that passes I think more people are being deceived."

The defendants have until June 29 to remove the information on tax benefits from their websites.