Lose-Lose: ClassicStar Breeding Scam Still Claims IRS ‘Victims’

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Former NFL player-turned-actor Bill Romanowski Former NFL player-turned-actor Bill Romanowski

In his playing days, former NFL linebacker Bill Romanowski was known for laying out opponents with vicious hits, occasionally drawing fines for his brutality.

Since his retirement, the 47-year-old has taken quite a few hits himself – first getting wrapped up in a massive horse-breeding scam, and now, taking a punch from the Internal Revenue Service.

He joins a long list of people who bought into the now-defunct ClassicStar mare-leasing program and came out the other side financially bruised and battered.

Late last month, a U.S. Tax Court judge ruled that Romanowski and his wife, Julie, owe about $5 million in back taxes for improperly claiming deductions related to their ClassicStar investment.  ClassicStar, whose principals pled guilty to tax fraud in 2009, targeted former professional athletes and others who knew little about the Thoroughbred breeding business.


“They were selling these horse-breeding investments as tax shelters in such a brazen way,” said Joel Turner, a Louisville equine attorney with Frost Brown Todd, LLC.  “This Machiavellian scheme created a bunch of taxpayer victims, and they are now dealing with the fallout.”

According to court documents, Romanowski wasn’t seeking a horse-breeding venture when he contacted Colorado tax attorney Rodney Atherton in October 2003.  The football player, whose career ended a month earlier, was looking for ways to offset more than $13 million in taxable income from the previous five years.  In their initial meeting, Atherton brought up ClassicStar, a new client of Atherton’s firm, Greenberg Traurig.  Romanowski later followed up and received a booklet from ClassicStar explaining the tax implications of investing in the horse business.  After visiting ClassicStar’s Kentucky operation twice, the Romanowskis established Romanowski Thoroughbreds, LLC and agreed to invest $13,092,732, exactly the amount of their taxable income from 1998 to 2003.

What the Romanowskis entered into, they would later learn, was a ruse.  Under its typical arrangement, ClassicStar promised to board and care for mares it allegedly owned, breed them to “top” Thoroughbred stallions, and produce foals the client could either keep or sell.  In addition to touting tax benefits, ClassicStar also encouraged investors to borrow their investment capital from the National Equine Lending Co.  The NELC was a shell funded entirely by ClassicStar.  ClassicStar would transfer the money for the loans to NELC, which would in turn give the money right back to ClassicStar – often the next day, court records show.

The Romanowskis borrowed nearly $11.8 million from NELC and received an initial list of 68 matings.  After further inspection, only four of the pairings were Thoroughbreds.  The rest were Quarter Horses, also typical of ClassicStar deals.  As a judge later wrote in a lawsuit involving other investors, ClassicStar sold far more leases than it could ever provide foals for and sent lists to clients that included Quarter Horse “placeholder” mares they didn’t even own.   Between 2001 and 2005, the company generated more than $600 million in sales but never owned more than $56 million worth of horses, according to court documents.

In his 2011 opinion awarding $65 million in damages to a group of ClassicStar investors, U.S. District Judge Joseph M. Hood wrote:  “The lion’s share of the investments were ultimately illusory (although the court cannot ignore that some Thoroughbred breeding actually occurred), the descriptions provided to investors omitted crucial facts, and, in large part, no one intended for the opportunities described to be realized.”

Bill Romanowski said in total, he received six Thoroughbred foals for his highly leveraged investment, but he said the foals were sold by ClassicStar without his knowledge “in a little bit of a fire sale.”

Even though there was little actual breeding to show for their participation, the Romanowskis claimed a deduction of $13,092,732 in expenses for 2003 and carried back net operating losses for five years prior.  In 2004, the couple received a tax refund of $3.9 million, most of which was used to pay down one of the NELC loans.  They were paying for their ClassicStar investment with the tax savings generated by said deal.  The Romanowskis never put another dime toward the debt, although in 2007, the loans were satisfied in full.  In his ruling against the Romanowskis, Tax Court Judge Joseph Goeke said it wasn’t clear who made those payments.

As attorney Rodney Atherton was advising the Romanowskis to take the tax deductions, he was taking a commission from ClassicStar for referring the Romanowskis to the breeding program. Atherton testified on several occasions that he never accepted any improper payments, but Judge Goeke said that was “clearly untrue.”  The Romanowskis testified they were unaware that their $13-million investment could have generated a $900,000 commission for Atherton.

In 2010, the IRS determined the Romanowskis owed millions in back taxes, a ruling challenged by the couple. In Goeke’s opinion last month, he said the Romanowskis weren’t liable for penalties on the unpaid taxes because the couple was advised by Atherton and another independent attorney. But he said the Romanowskis did owe the $5 million since they failed to meet most of the nine requirements for claiming expenses related to a for-profit business.  Those nine factors include the type of activity in question, material participation in the business, and the reasonable expectation of profits and/or appreciation in value.

“We recognize that tax planning is often a consideration when deciding whether to enter a business,” Goeke wrote.  “However, this case does not represent a normal instance of tax planning.  Rather, we believe (the Romanowskis’) participation in the program was almost entirely motivated by tax benefits available to them through such participation.”

Since their “participation” in and knowledge of the breeding business was so limited, and their profit motive so questionable, the Romanowskis and other ClassicStar clients faced an almost insurmountable task battling the IRS, said Louisville attorney Joel Turner.

“To a certain extent, ClassicStar depended upon the willingness of the taxpayer to participate in the fraud,” Turner said.  “I don’t think anybody’s going to be able to prove they can take those deductions.  It’s a damage-control situation.”

Turner said there have been cases of people failing to show a profit for 10 or 15 years in the horse industry, but because they could document their heavy involvement in their business, and prove their hard work and desire to make money, they have prevailed against the IRS.

“In other deals that are structured differently, if you’re not spoon-fed, if you actually do get involved, we’re talking about a totally different analysis,” said Turner.

Bill Romanowski was one of several former professional athletes targeted by ClassicStar. In a 2007 lawsuit, former University of Louisville and Boston Celtics player Greg Minor said he was pitched on the mare-leasing program by the company’s former marketing director David Plummer.  This happened at a meeting of retired NBA players in Las Vegas.  Like Romanowski, Minor signed onto a multi-million dollar deal and claimed tax deductions that were later rejected by the IRS. In his still unresolved suit against ClassicStar, Minor sought $2 million in interest and penalties assessed by the IRS.

In 2009, Plummer and his son, Spencer, John Parrot, and accountant Terry Green all pled guilty to committing tax fraud totaling $200 million. Two years later, in awarding $65 million to investors including Arbor Farms, Nelson Breeders, and West Hill Farms, Judge Hood said of ClassicStar: “The gig is up.” His 99-page opinion on the convoluted scam included details of how money was funneled from the mare-leasing program into an oil and gas company that drilled few wells and was primarily designed to enrich ClassicStar principals with stock.

“Plaintiffs have set forth a compelling and well-supported account of how defendants misrepresented the reality of the mare-lease programs offered through ClassicStar and how, acting together, they took plaintiffs’ money to use for their own ends, then worked to prevent the discovery of the ruse and to perpetuate the cycle of investment,” wrote Hood.

Still, as the Romanowskis and others found out, getting scammed in the horse-breeding business doesn’t necessarily let you off the hook with the IRS.  Turner said there are, of course, legitimate ways to operate in the equine industry, and there are tax benefits, but ClassicStar made it seem all too easy.

“It was an outrageously aggressive marketing campaign by people who knew how to sell. The representations they were making were way beyond what other people would to do to induce people to invest in any kind of horse deal.”

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  • http://www.facebook.com/people/Paula-Esposito/100001620845560 Paula Esposito

    It kind of reminds me of the Calumet mess.

    • Pml601

      More like Spendthrift.

      • RayPaulick

        Note: References to Calumet and Spendthrift are from previous era and different ownership for both farms.

        • Don Reed

          Speaking of which, this is what sank Van Johnson’s finances in the early 60s (actor, circa 1940s-70s), & what cost Ed Wynn (comedian, 1910s-60s) @  a million dollars in IRS penalties in the 1930s (the two were somewhat “related” by marriage, with Van Johnson becoming the husband of Edie, who had left Ed’s son, Keenan.  These things get as complicated as taxes).

  • Realestate

    It’s people like Classic Star that gives our sport such a bad name, and how they get away with it is beyond my understanding. I once stopped a friend of mine from investing in cheap horses who’s values were inflated by these guys entertaining potential investors on a boat. I couldn’t believe how blatant they were with their story. I couldn’t get off that boat fast enough!

    • Sandra Warren

      It’s amazing how often these investment schemes get presented on a boat.  Maybe because out on the water you are their captive, and you can’t get away until you get the entire hard sell.

    • LongTimeEconomist

      You should have contacted the SEC.

  • Jerry

    Ray:

    Why did you remove my posting about the illegal conduct at LANES END FARM? Did Farish demand that you do so?

    What’s wrong Ray, can’t you allow the truth to be exposed about one of your advertisers?? If you don’t believe this post, call Bill or Will and ask them about their secret AP INDY syndicate payoff to JOSHAM FARMS.

    Have some BALLS Ray and repost my posting!!!!!!!!!!!!

    I await your response!!!!!!!!!!!!!

  • Jerry

    BREAKING NEWS:
    THIS IS NOTHING COMPARED TO WHAT THE FARISH’S ARE DOING AT LANES END FARM!!!!! FARISH HAS/IS MAKING SECRET PAYOFF DEALS WITH “SELECT” SHAREHOLDERS (JOSHAM FARMS- CANADA) AND SCREWING THE NON-SELECT SHAREHOLDERS IN VIOLATION OF THE VARIOUS SYNDICATE AGREEMENTS. (AP INDY SYNDICATE)IT’S JUST A MATTER OF TIME BEFORE FARISH IS EXPOSED FOR HIS ILLEGAL CONDUCT. STAY TUNED!!!!!!!!!!!

  • Nucky Thompson

    I am not a big fan of income tax but the whole code needs to be simplified to eliminate the many “legal” schemes that permit the mega wealthy to pay less tax than the ordinary joe. Have absolutely no sympathy for the Romanowkis whose sole aim in this venture was to avoid paying any tax on their $13m+ annual income. I guess Romo should not have been leading with his head for all those illegal hits he handed out.

    • nu-fan

      I agree with every point that you have made.  It’s interesting how so many in the sports (and entertainment) world are at the center of this.  They earn millions of dollars that are often fan supported but when it comes down to paying taxes to put back into the system that got them those millions, some of these individuals turn out to be greedy guts.  But, yes, I agree that the tax codes are beyond the abilities of most people, even those with college degrees.  And, those tax codes often change from year to year.  How does one keep up with those changes?  In my case, I hire an accountant whose business it is to know all of those tax codes and who makes certain that everything that we file is accurate.

    • kyle

      You’re right. Romo’s not a very sympathetic character. So this is not a defense of him, per se. But a code unknowable in all its complexity that leaves the typical taxpayer at the mercy of “experts”, in a system where only a sucker pays a penny more than is required…it’s pretty hard to judge anyone who runs afoul of such a system too harshly.

    • LongTimeEconomist

      You’re right, Nucky. Romanowski should have been looking at tax deferral programs during the years he was making that money, not ex post facto.

  • Don Reed

    The CS losses continue, but the Kadashian breeding scam remains the Tiffany standard.

  • Sandra Warren

    Our political leaders should make note of how many “likes” kyle’s post has, compared to any other post by any other person on the Paulick Report.  Eight at the time I’m writing this, probably a lot more before this thread expires.

  • nu-fan

    And, yet, the public votes in those who make decisions on governmental spending.  As long as the population keeps voting in those who keep expanding entitlement programs, taxes need to be increased to pay for them.  Shouldn’t we be held, to a large degree, responsbile for those evil income taxes by the votes that we cast?

    • Rvrvue1890

      If the ones we vote for do not win the election, we are still screwed.  The candidates who could really help us do not have the big bucks for campaigning like the rich candidates.  Then you have those who want their Obamaphones and will vote for a person simply because of the color of his skin regardless of his platform.  I am frustrated because we don’t have the right candidates.  Forgive my rambling.

      • nu-fan

        You don’t need to ask forgiveness on this issue.  It is very frustrating but, instead of feeling that way, put it to good use!  Get involved in the election process.  Support those candidates that represent your beliefs and, then, go out there are write those letters to the editor of your local paper.  Get neighbors, friends, and relatives also involved.  I think of our election process not as a continuum but as a pendulum.  It swings back and forth but is just a matter of timing.  I live in a state that is sooooo not of my political persuasion but I have to blame my party for doing a crappy job in what it supported, which was wayyyy toooo farrrr right.  That party abandoned many of its own members.  I am making a vow to get more involved from now on.  I’d like you and everyone else to do the same.

      • http://twitter.com/slewfan Di

        Agree. However, we’ve had a huge amount of voter fraud, some in 2008 but a staggering amount in 2012; yet no one talks about it!  We had some good candidates who didn’t get elected b/c of voter fraud.  From the Soros-owned voting machines defaulting to BHO, to sacks of absentee ballots not counted, stored in warehouses, etc., to ppl voting twice, to ppl not eligible carried in by caravans and buses by unions/Acorn/etc. and told to vote for BHO, etc. We will never have another fair, honest election if we don’t resolve the voter fraud issue.  I’m like Dr. Ben Carson, tired of the “PC” [deleted]….gotta talk about these things out in the open and expose the frauds who r stealing our hard-earned $.  One bright spot that occurred this week, the Rand Paul filibuster.  It was historical, and gives all ppl who want to follow the constitution and want the govt out of our lives, a shot in the arm. We need more Dr. Carsons, Rand Pauls, Ted Cruz’s, etc.  We don’t need any more socialists, anti-American candidates running for office, and worse, occupying a seat in congress or the WH.

        • Philo

          … as naive as Romanowski

    • Jack

      nu-fan…..voting means nothing.  Regardless of who “wins” the election, they are controlled by the same interests….Consider Obama… when you hear his campaign speeches, you imagine he’d be the polar opposite of Dubby, yet on the big issues (banker bailouts, expanding wars, stealing civil liberties, ramping up the debt full throttle, Cabinet full of the same scumabgs, bowing to Israel), they march in lock-step…..even if votes did count, as Stalin said, it’s who counts the votes that matters.  Electronic votes can be flipped to make it 51-49% every time (you can watch a youtube video about it).  Everything is corrupt to the core and getting worse.  Unfortunately, 99.9% of the population is asleep….we’re in Huxley’s Brave New World right now, but once the ponzi scheme economy collapses, we’ll be in for a thousand years of Orwell’s 1984. 

      I suggest everybody read up on G Edward Griffin and pass his name along to everyone you know.

      rant over

      • nu-fan

        Good to rant every once in a while.  I, sometimes, wonder if we shouldn’t have a strong third party.  Neither of the two that we have right now represents my thinking and, I suspect, there are a lot of others who feel the same way.  But, perhaps, we need to have these kinds of discussions on another website…. We’re getting further and further away from horses and horseracing.

    • Don Reed

      After the Guest comment was removed, it acquired more Like votes.

      If Romney had dropped out of the race in October, he might have won. 

  • nu-fan

    I’ve been intrigued with a theory that a Stanford geneticist has recently published.  Dr. Crabtree has put forth a theory that human intelligence peaked about a thousand years ago.  It is a controversial theory, granted, but it is one that I think about when I see incidents like this one where someone is dangled a bright shiny bauble and cries when he finds out that it is not a diamond but a piece of glass.

  • Marty

    Just what the sport of racing needs. Another reason why people with money don’t need to invest in horses…

  • Tipton

    Maybe Romanowski can become a TVG on-air analyst.  They seem to like to hire ex-sports guys who owe lotsa money from horse schemes.

    • Don Reed

      Nominated for best line of the month.

  • Barry Irwin

    The only way outfits like Classic Star can exist is if there are customers looking to beat the government out of the taxes they owe.

    Anybody that would own horses mostly for the tax advantages is stupid.

  • Graustark

    Di, it’s a free country. You are free to leave it and take Comedian Paul with you.

  • Richard C

    ClassicStar was an aggressive advertiser for these upper-end folks wanting to play an angle in the same way Karakorum Racing heavily marketed itself for railbirds looking to get into the game. And – once the suits in both joints fled in the midnight hour and disconnected the phone lines – the rubble left behind showed elements of the classic Ponzi scheme. There are great people in this sport who do the right thing each day – Zilla Racing, a new group on the NYRA circuit, is a solid example – but these heavy black eyes from the shots by crooked players continue to be a dark cloud over the entire industry.

    • nu-fan

      But, haven’t we seen this kind of scam before.  Think Bernie Madoff.  I had a bit of a hard time sympathizing with those wealthy investors who were so stupid to think that Madoff could yield them the kinds of returns that he promised.  That, to me, was greed (and utter stupidity) on their part.

  • Anderson5999

    A scam in thoroughbred racing? Say it ain’t so!

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