Commentary

One turbulent ride for Castroneves

Updated: March 24, 2009, 10:52 AM ET
By Ryan McGee | ESPN The Magazine

Helio CastronevesAP Photo/Alan DiazHelio Castroneves, right, arrives at federal court in Miami with his sister, Katiucia Castroneves, and attorney David M. Garvin.

MIAMI -- At 7:40 a.m. on a damp weekday morning, Helio Castroneves and his sister Katiucia sat together on a bench outside the U.S. Federal Courthouse downtown, just the two of them. Kati quietly checked her phone for e-mails while Helio, never one to sit still, jumped to his feet and launched into stretching exercises to try to burn off some nervous energy.

Three weeks earlier this same municipal courtyard was the sight of a small media circus, a waiting mob that included television stations from Miami, Indianapolis and South America, newspaper reporters, sports writers, even "Entertainment Tonight" and TMZ. They came to watch the two-time Indy 500 winner and "Dancing with the Stars" champion make the walk of shame up the sidewalk to face charges by the IRS that he had failed to report and pay taxes on more than $5 million.

But now, little more than a week away from being handed their fate by a jury of their peers, the racer and his sister/co-defendant sat together in the misty morning rain, totally alone.

"It is like being on an airplane," the 33-year-old Brazilian said as the members of their eight-person legal defense team began to arrive. "There are moments when you climb, moments when you dive and moments of turbulence. It has not been a fun flight."

Then, as he turned to enter the building, Castroneves paused and dug deep for one of his trademark smiles.

"The good news is that this plane will be landing soon."

Now the question is where. As the trial resumed Monday morning for this its fourth and likely final week, that answer will be here soon. And while the national media may no longer be interested in the day-to-day details of the case, there is no shortage of people who are, scattered from Sao Paolo, Brazil, to Mooresville, N.C., and from the back lots of Hollywood to paddocks and locker rooms across the entire American sports landscape.

The basics

The lack of national media attention has been blamed by print and digital assignment editors on the excruciating minutiae of a tax law case. A general lack of, as one Indianapolis sports writer put it, "sexiness."

The titillation of an initial witness list that included three-time NASCAR champion Jimmie Johnson and American business mogul Roger Penske (neither is expected to testify) has given way to a month of tedious testimony from accountants, bookkeepers and IRS investigators.

[+] EnlargeHelio Castroneves
AP Photo/Michael ConroyHelio Castroneves won back-to-back Indianapolis 500 titles in 2001 and '02.

But buried beneath the doldrums of overexamined paperwork and contracts involving two languages over three continents is what boils down to a relatively simple case.

The United States believes that Castroneves -- with the aid of co-defendant Kati Castroneves -- founded and secretly ran a Panama-based shell corporation for which the only real purpose was to protect income earned in the U.S. from being taxed by the IRS. Then, with the aid of the third co-defendant, Michigan sports attorney Alan Miller, they schemed to bog down the delivery of a $5 million deferred royalty payment from Penske Racing, buying time to devise a more ironclad plan for tax-free delivery of the money.

In total, the United States is seeking tax payment on roughly $5.5 million earned between 1999 and 2004, including the deferred check from Penske plus assorted income earned while Castroneves drove for Hogan Racing in '99.

Prosecutor Matt Axelrod told the jury, "When it came time to pay taxes on the millions of dollars that [Castroneves] made, he turned his back. He didn't pay."

The defense contends that what has been labeled a shell corporation was in actuality a legitimate business never owned or managed by Castroneves, but rather by his father and a Brazil-based attorney. The defense also claims that the racer fully intends to pay taxes on the $5 million payment when he receives the money in May 2009. (Deferred royalty payments are common with large sports contracts, described by witness and tax attorney Fred Feingold as being "like a retirement fund.") Furthermore, the defense has argued that the racer -- like most professional athletes -- has long remained detached from the details of his financial affairs, concentrating on competing while leaving the paperwork to others.

It is hardly the image of a criminal mastermind.

"God bless him, but he's clueless," one of the driver's attorneys, David M. Garvin, said in a very candid conversation with ESPN.com late last week. "He may very well be the best driver in the world at Indianapolis, but he's not going to be doing anyone's tax returns soon. If I threw the Internal Revenue Code at him and said, 'OK, figure this out,' it wouldn't matter if I came back in an hour, a week or a month. He'd still be at the same place. Page 1."

How did we get here?

In 1999 Castroneves wasn't a racing or dancing star. In fact, he was barely recognizable among even the most dedicated fans of his sport.

He was simply a sophomore racer in CART, the now-disbanded open-wheel racing series, driving for second-tier owner Carl Hogan and a team that existed in the long shadows of motorsports powerhouses such as Chip Ganassi Racing and Marlboro Team Penske.

His mentors were his father, Helio Castroneves Sr., and Brazilian racing legend Emerson Fittipaldi, a former Indy 500 and Formula One champion who had taken young Helio under his wing. The elder Castroneves, who sold cars in Sao Paolo and industrial pipe in rural Brazil, had nearly bankrupted himself while bankrolling his son's early racing career, from go-karts in Brazil to F3 in Europe, and eventually Indy Lights in the United States.

[+] EnlargeHelio Castroneves
AP Photo/Nam Y. HuhHelio Castroneves attracted a new fan base when he teamed with Julianne Hough to win the 2007 "Dancing with the Stars" competition.

Fittipaldi eventually offered up a management agreement with the family and helped the racer land his first rides in CART, first with Bettenhausen Racing and then with Hogan. The latter ride was arranged on the condition that Fittipaldi would secure $3 million in sponsorship for the team.

Unfortunately, the legend was not a salesman: The money was never raised, and Hogan stopped paying Castroneves a salary, though Hogan promised to keep him in the car as long as he paid his own way. Desperate for income, Helio once again turned to his father -- and now also his sister -- for help. They approached Brazilian attorney Osiris Correa, who formed a company that would go out and recruit sponsors for Castroneves and Hogan.

That company, titled Seven Promotions, was incorporated in March 1999 in Panama, presumably to avoid Brazil's high inflation, legendary crime rate and shaky tax laws, and to sidestep Helio Sr.'s credit problems incurred during years of overextending his finances to underwrite his son's racing. Upon its creation, Seven Promotions quickly inked a licensing agreement with Castroneves, its only client.

Ten years later, the true purpose of Seven's creation and the identity of its actual owners make up the central debate on which United States v. Helio Castroneves now hinges.

The IRS believes that the company was in fact owned by Helio Jr. all along. If not directly, then indirectly through Controlled Foreign Corporation laws, which can tie someone to corporate ownership if: (A) the person owns 50 percent or more of the stock, or (B) that same amount of stock is owned by a parent, spouse or child.

The defense argues that because Castroneves has no children, is not married and has parents who are not U.S. citizens, he cannot be tied, even indirectly, to ownership.

"The government never dotted the I's here," Garvin says. "They made a mistake and ended up indicting the guy. And instead of admitting the blunder, they are now trying to jam it down everybody's throat."

Tragedy + Opportunity = Confusion

On Halloween in 1999, CART ran its season finale at the then-called California Speedway. Castroneves went to Fontana with Hogan Racing and finished 20th out of 27 entries, thanks to a blown engine in his unsponsored Lola-Mercedes. As he walked to his rental car to leave the track, the racer believed that his big league career might very well be finished. All major rides for 2000 were filled; Hogan had decided to shut down his team; and Castroneves had ended his management agreement with Fittipaldi due to lack of results.

Then, as he made his way across the parking lot, Castroneves was stopped by representatives of Penske Racing. In one of the greatest tragedies in recent open-wheel memory, promising young Canadian racer Greg Moore had been killed during the race in an ultraviolent backstretch crash.

Moore had already signed on to drive for Penske in 2000, a marriage being touted as open-wheel racing's Dream Team, but now Moore was gone and Penske management wanted to talk to Castroneves about taking over its coveted No. 3 car.

Upon returning to Miami, Castroneves asked his attorney Mark Seiden to follow up with Penske about doing a deal. Seiden suggested that they contact Alan Miller, a former Oakland Raiders fullback and well-respected sports attorney who had negotiated contracts within the motorsports community for more than 30 years. In fact it was Miller who had spent the previous six months hammering out the Moore-Penske contract negotiations.

Every day we get back on that plane. Up and down, turbulence, whatever the day brings we just keep hanging on. Hanging on until it finally lands.

-- Helio Castroneves

Miller, still in a state of deep grief over the loss of his friend and client, returned from Moore's funeral and was told that, due to sponsorship pressure, the deal with Castroneves needed to be completed by Nov. 5, 1999, only five days after the California race. To get it all completed in time, Miller's office simply rewrote the Moore-Penske deal, replacing all references to Moore with the name of Castroneves.

This created problems on a couple of fronts when it came to taxation. First, Moore was a Canadian citizen residing in the Cayman Islands and Castroneves was a Brazilian citizen living in Miami. The promotions company that held Moore's licensing rights, Greg Moore Enterprises, was wholly owned by Moore and that was OK because he did not live in the United States.

In the new contract, Miller's office claims that it simply replaced the name of Moore Enterprises with the name of Seven Promotions, which in essence identified Helio Castroneves as the owner of the company, and, because he was a resident of Florida, placed any income sent to Seven Promotions within the jurisdiction of American tax law.

On the afternoon of Nov. 4, 1999, the four-document deal was signed. Helio and Kati Castroneves focused purely on the bottom line ($1 million over three years plus a percentage of prize money won on the track, with a $5 million deferred bonus payment) and chose not to go point-by-point through the deal, merely turning to the last page and signing. Had they read through the agreement, and perhaps had Miller's office not been in such a hurry to have the deal done, they would have seen that Helio was listed as the owner of Seven Promotions.

The defense claims that it was all merely a clerical error, a misunderstanding. The U.S. says that it is evidence of the truth -- that Helio Castroneves owned and managed Seven, and thus is responsible for what the government believes was the company's role as a tax shelter.

That night, everyone involved describes the scene of the racer bouncing up and down on one bed of his hotel room while his sister jumped up and down on the other. To them, the new contract was a dream come true. Ten years later, it would have them living a nightmare, one that might end with six-plus years behind bars.

New deal, new problems

Six weeks later, with clearer heads and nongrieving hearts, Miller and Castroneves sat down to go back through the paperwork and talk about their future together. It was during this meeting that Miller's representatives say that Miller realized a mistake had been made in the contracts and that his client was not the owner of Seven as the pushed-through paperwork reflected.

As Miller dug deeper, he says that he realized that the driver's '99 agreement with Seven was neither designed nor equipped to handle a contract as massive as the new Penske deal. He also had reservations about sending $5 million to a newly formed company located in Panama that was created by a Brazilian layer whom he had never met. Furthermore, Miller had uncovered an issue that was described in court Wednesday as "a giant hole" in the contract. There was no specific date spelled out for Seven to deliver the deferred payment to Castroneves. To Miller it all seemed very dicey, or, in his words, "scary."

[+] EnlargeHelio Castroneves
AP Photo/Duane BurlesonThe dancing title made a pop-culture icon out of Helio Castroneves, who threw out the ceremonial first pitch before a Detroit Tigers game in August 2008.

The IRS believes that those problems, while valid, were not the primary source of Miller's growing concern. Rather, the IRS claims that Miller was motivated to change the deal because he realized that his client would lose 30 percent of the payment to taxes, which would be taken out by the accountants at Penske Racing if the check were to be sent to a corporation in Panama.

Miller immediately wrote a letter to Penske telling the team not to send any money to Seven Promotions or anywhere else until he got back to them with a new plan. On June 5, 2002, less than two weeks after winning his second consecutive Indy 500, Castroneves traveled with Miller to New York and met with tax attorney Fred Feingold, a specialist in deferred compensation deals, and met for more than three hours. "About half" of that meeting was dedicated to discussing the driver's relationship with Seven. Feingold testified that Castroneves told him that he did not own Seven.

The defense says this admission is proof that the driver has been telling the truth all along. The prosecution points to it as yet another moment when the racer lied to yet another person about his role.

In the fall of '02, Feingold and Miller drafted a new deal with Dutch-based Fintage Licensing and informed Penske Racing that Fintage should now receive the $5 million payment, payable in May 2009.

Why did it take nearly three years to make the switch from Seven to Fintage? The defense claims it was because the initial Seven deal was so poorly executed that it took that much time to sort through the roadblocks. Plus, Fortis Bank, the financial institution backing the deal, put a one-year hold on all new deferred royalties while it mulled over a possible sale of Fintage.

Confused? The IRS says not to be embarrassed if you are, claiming that you have been driven to that point by an elaborate two-part scheme. First, a design to create confusion around who indeed owned and controlled Seven Promotions. Then a stall tactic to keep the money frozen until a plan could be devised to have the cash delivered to a location well outside the long reach of U.S. tax law.

Prosecutor Axelrod claims that even though Castroneves has yet to receive the disputed Penske royalty check, he should have already paid taxes on it under claims of "constructive receipt," which does not require actual possession of taxable money, only the promise of it. The government believes that the racer's ultimate goal was to leave his home in Coral Gables, Fla., to reside in a tax haven such as Monaco, already home to multiple open-wheel racers from around the world.

Axelrod told the jury during his opening statement, "It was the only way they could achieve their goal of having Helio Castroneves illegally get his money tax-free."

Paging Sugar Ray

Castroneves' fate may very well lie in the hands of, believe it or not, late boxing great Sugar Ray Robinson. While negotiating a fight at Madison Square Garden in 1957, Robinson asked to have his payment broken up into halves and delivered over the following two years. The IRS balked, but the six-time world champion claimed that the U.S. tax code actually allowed the practice as long as the payment schedule was spelled out before the services were rendered. Soon thereafter, his claims were upheld in U.S. tax court.

It was the beginning of deferred payments in the sports world, now a highly common practice. But the general lack of understanding of how it actually works -- in particular, among the Castroneves jury -- is an admitted source of great stress for the racer's defense team as it argues that the largest chunk of money in question was set up for payment well after the Seven Promotions deal was broken off.

A second case being invoked by the Castroneves defense dates back to 1967, involving former Chicago Cubs catcher Randy Hundley (eventual father of another big league catcher, Todd). Upon signing his first pro contract in 1960, Hundley sought to give half of his earnings to his father, who he argued was his manager and agent and who had given up so much of his own life to support his son's career. Again, the IRS balked when Hundley tried to write it off as a deductible expense, but again the tax court ruled in an athlete's favor.

"Same problem here," Garvin explained. "They want to tax Helio on money he paid his father. But as far as we are concerned he could never pay his father enough for what he did."

Helio CastronevesAP Photo/Darron CummingsJudgment day awaits Helio Castroneves. "The good news," he says, "is that this plane will be landing soon."

You are not alone

While the defense team looks to athletes of the past for help, athletes of the present and future are monitoring the Castroneves case with great anticipation, particularly within the motorsports world, even as national media coverage has been hard to come by.

In Mooresville, Penske Racing continues to prepare Helio's cars as if he will be back in them when the IndyCar season takes the green flag in St. Petersburg, Fla., on April 5. For now, Australian Will Power is behind the wheel as a substitute, but the Team Penske members continue to text, e-mail and phone in their support for Castroneves, though he rarely calls them back for fear of saying something that might find its way back into court.

"Between the team and the fans, I spend a lot of time going through e-mails and texts," Castroneves said during a break in Wednesday's proceedings. "It has been overwhelming. I hope they understand that I am reading them, I just can't respond during the trial."

In Speedway, Ind., the people who run and market the IRL contemplate a potential month of May without their second-most-recognizable star behind Danica Patrick.

In Hollywood, the producers of "Dancing with the Stars" are constantly inviting back former contestants and winners to sit on the front row and work the entertainment show circuit to promote their wildly popular show. The one face missing from the first three weeks has been arguably their most popular winner. Again, the texts and calls come in, especially from former dance partner Julianne Hough. But again, he can't call them back.

At the Rolex 24 at Daytona in early February, racing stars from around the world talked about the absence of the driver who finished third in the event one year earlier. What's more, they admitted that to a man they were each going back through their own contracts and licensing agreements, scared that their financial lives might also contain another "giant hole."

In the Sprint Cup garage many are doing the same, especially the numerous clients of Alan Miller, including team owners, sponsors, crew chiefs, media members and a long list of drivers that includes Clint Bowyer and Jimmie Johnson. Johnson, who has publicly supported the attorney throughout the trial, has been handing over his financial affairs to Miller since he was a preteen.

"You spend 40 years building a reputation in this business," Miller said during a break in Wednesday's proceedings. "And it takes one accusation like this to potentially tear it all down. It's unbelievable."

Fourteen miles north, at Dolphin Stadium, even those in town for the World Baseball Classic talked about the trial taking place just down I-95. Mets first baseman Carlos Delgado, in the WBC with team Puerto Rico, remembered what it was like to come to the United States in 1992 as a 19-year-old kid who spoke little English, much as 20-year-old Castroneves did when he arrived from Brazil to race Indy Lights.

"One day you are a teenager living at home with no money," the 15-year MLB veteran said as he shook his head. "The next day you are sitting in a big office building with lawyers and agents and executives and they are all talking about things that you have no idea about, and it's about you. You just want to play your sport and so you hand those things off to these people that don't speak your language and you now trust your life with. If they don't do it right, no one blames them. They blame you and it is your name that ends up on ESPN. It is scary. And we all go through it in every sport."

White flag

On Monday morning the trial resumed its fourth week following a four-day break. Axelrod and the prosecution expect to rest their case by midweek, and most involved anticipate the case to be in the hands of the jury as early as Friday.

Though it might not rate high on the sexiness meter, the impact of a guilty verdict would be felt throughout the sports world. And not just in the IndyCar and NASCAR garages, where a scramble would no doubt ensue to fill one of the most sought-after rides in all of motorsports. The absence of Alan Miller would create a chasm on at least one side of literally every boardroom negotiation within the sport, and in some instances, on both sides.

Even a declaration of innocence likely won't be enough to remove the stain from the reputations of Miller and his clients. The close-knit, sometimes high school-ish racing community is a forgiving place, but only so much.

In the meantime, Helio Castroneves and his sister will continue making their lonely 15-minute drive every morning, from the racer's mansion in Coral Gables to the courthouse on North Miami Avenue, the same sparkling new tower where the U.S. government tries the most notorious drug dealers in the world. The pair has no idea if the media circus will roll back into the courtyard to greet them when that fateful judgment day finally arrives.

Truthfully, they don't care. They just hope they can greet the paparazzi with a smile.

"Every day we get back on that plane," the racer says with a shrug, returning to his metaphor of flight. "Up and down, turbulence, whatever the day brings we just keep hanging on. Hanging on until it finally lands."

Ryan McGee, a senior writer for ESPN The Magazine, is the author of "ESPN Ultimate NASCAR: 100 Defining Moments in Stock Car Racing History." He can be reached at mcgeespn@yahoo.com.

Ryan McGee | email

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