Nov 12th 2013
By Teresa Ambord
If the IRS is correct, Colombian NASCAR driver Juan Pablo Montoya owes the government a bit of money. Like $2.7 million. Montoya concedes he may have underreported some income, perhaps $800,000 in the two years the IRS is targeting, but he maintains the tax agency is way off.
Now the case is going to the US Tax Court.
Here's the Rundown
Thirty-eight-year-old Montoya just signed on to drive in 2014 with the IndyCar team of billionaire Roger Penske. That's also the team of race car giant Helio Castroneves, who coincidentally, had his own well-publicized battle with the IRS a few years ago. Like the Castroneves case, Montoya's tax troubles involve the sale of image rights and sheltering the income from these sales in offshore corporations.
As a nonresident of the United States, Montoya rose through the ranks of the racing world, winning the Indy 500 in 2000 and then racing Formula One in Monaco. While living in Monaco, his manager/father set up a trust for him in the Bahamas, under the name of JPM Motorsport, Inc. Montoya "contributed" his "Driver Identification" – his name, appearance, likeness, image, voice, and bio – to JPM.
In 2007, Montoya became a resident of the United States and joined NASCAR. He was advised then, to "domesticate his foreign assets to the United States," according to Forbes magazine. To accomplish this goal, he set up a Delaware company, Monty Motorsport, LLC. At some point, JPM Motorsport sold Montoya's Driver Identification to Monty Motorsport for a $15 million note. Then Monty Motorsport began amortizing the investment, taking a deduction in 2007 of $1.4 million and another $1 million in 2008.
This is where the IRS gets a little testy. The tax agency disallowed both deductions, on a variety of grounds. The IRS' chief objection seems to have been that all the dealings described above were "related party transactions," says Forbes. They call these transactions a "sham" and allege Montoya's aim was to "improperly claim amortization deductions in self-created intangibles and to artificially create basis for such deductions."
Montoya's attorney couldn't be reached for comment, but Miami tax attorney, David Garvin – who isn't involved in the case – told Forbes, he takes issue with the IRS' use of the word "sham." The tax rules, he said, which are meant to prevent this kind of transaction "may end up giving a non-US taxpayer a benefit that was not foreseen." But the rules are still law, and the unintended benefit "doesn't give the IRS the right to rewrite the law simply by calling something a sham." Garvin successfully represented Castroneves in his case.
The Forbes article says this is a case of the IRS wanting to play a game of "heads I win, tails you lose." In other words, explains Forbes, the tax agency wants to call Montoya's trust a sham when it benefits Montoya, but recognizes its legitimacy when it results in a nice piece of tax revenue.
Advice from a Winner
In the upcoming season racing for IndyCar, Montoya will team with Castroneves, who is a three-time winner of the Indy 500. But Castroneves' real victory may have been when he was acquitted of the federal charge of tax evasion against him in 2009.
Montoya seems to be doing fine, fighting the IRS with his own attorneys and manager/father. But it couldn't hurt to buddy up with Castroneves, whose win against the IRS captured national attention and had racing fans as well as nonfans on their feet cheering.
- Castroneves Tax Trial Diary - The Wait Is Over
- Sergio Garcia and Retief Goosen Tax Cases: Double Bogey for IRS