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