$5 million key to Castroneves trial

Updated: March 9, 2009, 4:40 PM ET
Associated Press

MIAMI -- To this day, race-car driver and "Dancing with the Stars" winner Helio Castroneves hasn't seen a single dime of $5 million in licensing money he was promised under a 1999 contract with Penske Racing. It's either been parked at Penske or is still idling in a Dutch investment account.

But the Internal Revenue Service says Castroneves owes U.S. income taxes on the money anyway, contending the 33-year-old driver can't avoid tax by simply refusing cash to which he's entitled. A complex concept known as "constructive receipt" is at the heart of the prosecution's case against the two-time Indianapolis 500 winner.

Testimony resumes Tuesday in the tax trial of Castroneves, his business-manager sister Katiucia Castroneves -- both originally from Sao Paulo, Brazil -- and his lawyer Alan Miller of Birmingham, Mich. All are charged in a seven-count federal indictment with conspiracy and tax evasion from 1999 to 2004.

The three defendants are facing more than six years behind bars if convicted. Trial is expected to last about a month.

Experts say jurors will have to decide if the Castroneves deal was real or contrived to make it appear he didn't have control of his Penske money.

"What the government is saying is, if you are entitled to some cash, and you leave it in your mother's bank account, it's still your cash," said Chas Roy-Chowdhury, a tax expert with the global industry group Association of Chartered Certified Accountants.

Castroneves is a top Indy Racing League driver, winning the Indy 500 in 2001 and 2002 and finishing second in 2003. In 2007, he gained even greater fame by winning TV's "Dancing with the Stars" competition.

Issues at trial have their origins in the final event of 1999 of the Championship Auto Racing Teams, or CART -- at the time a rival of the Indy Racing League. On Oct. 31 of that year in Fontana, Calif., Castroneves was driving in the final race for his soon-to-be-disbanded Hogan team and Greg Moore was about to sign a lucrative new contract with Penske Racing.

Moore crashed and was killed. In less than a week, Penske signed Castroneves, using Moore's contract by simply crossing out the old names and amounts and replacing them in handwritten notations. Miller negotiated that deal for $6 million -- $1 million in paid directly to Castroneves and $5 million to license Castroneves' name and image.

At first, the $5 million was supposed to flow to a Panamanian corporation called Seven Promotions.

In mid-December 1999, Miller sent a letter to Penske asking that the transaction be halted, according to trial testimony. Penske's general counsel, Lawrence Bluth, said the company held onto the Castroneves cash until January 2003, when it was invested with Netherlands firm Fintage Licensing B.V., where it remains today.

"We were ready to make payments to Seven Promotions. We were told not to," Bluth testified.

The IRS and federal prosecutors charge that arrangement was a tax dodge.

They contend Castroneves secretly controlled Seven Promotions -- disputed vigorously by the defense -- and should have paid U.S. taxes under the "constructive receipt" doctrine as soon as Penske was ready to start cutting checks.

"The individual's wishes do not control," said Assistant U.S. Attorney Matt Axelrod. "A taxpayer may not deliberately turn his back upon income and thereby select the year for which he will report it."

Miller, a former professional football player and architect of the Castroneves contract, contends the IRS is wrong. In court papers, Miller attorney Robert Bennett said Castroneves never had control of the $5 million and therefore owes no tax.

Castroneves planned to pay the IRS when the "deferred royalty agreement" -- a way of delaying income described as similar to a 401(k) -- at Fintage comes due to him in May of this year, defense lawyers say. It's not unusual for athletes to receive some compensation at later dates, they say.

"Athletes ordinarily have a short period of economic productivity in their youth, and they may not be responsible enough to manage the money for a lifetime if they receive it all at once," Bennett said.

Axelrod, however, said the whole arrangement is fictional, with Castroneves' ultimate goal to move out of the U.S. to a tax haven such as Monaco where he would eventually get the Penske money tax-free.

Castroneves attorney Roy Black said the driver, who lives in a $2.2 million home in Coral Gables, never schemed to hide money from the IRS. He said in opening statements that the driver knows nothing about U.S. tax laws and relied on experts to handle his finances.

"They've come up with a fiction," Black said.


Copyright 2009 by The Associated Press

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