The IRS claims that NASCAR Sprint Cup driver, Juan Pablo Montoya, failed to disclose full income in 2007 and 2008. If the IRS allegations are correct, Montoya, who has been in the NASCAR Sprint Cup Series for seven years and is set to shift back to Team Penske’s IndyCar program soon, owes at least $2.7 million to the IRS. The tax agency says Montoya under-reported taxable income by $7 million in 2007 and 2008, in part by writing off his own “Driver Identity.”
The “rights to Montoya’s image” seem to be at issue in this case. Montoya, a Columbian citizen who calls Miami home, and the IRS are at odds over revenue earned for his image and likeness. The IRS is also investigating some of the offshore accounts and offshore corporations used by Montoya.
Montoya moved to the U.S. when he made the switch from Formula One to NASCAR in 2007, and the IRS appears to believe Montoya’s “image front” was a sham. In 2001 he contributed his name, appearance, image, likeness, bio and voice (which he referred to as his “Driver Identification”) to JPM Motorsport, Inc., a Bahamas corporation owned by a Bahamian trust his father had established for him in 1999. However, in preparation for moving to the United States, Montoya created Monty Motorsport LLC in 2006, a Delaware limited liability company. He then orchestrated a sham, according to the IRS, or it could be viewed as a clever exploitation of a tax loophole.
Montoya’s JPM Motorsport sold his Driver Identification to his Monty Motorsport for a $15 million note in 2006. Monty Motorsport then began writing down the value of (amortizing) its $15 million investment, reporting a $1.4 million deduction in 2007 and a $1 million deduction in 2008. The IRS disallowed the deductions, claiming the Driver Identification transaction was a sham designed to improperly claim amortization deductions in self-created intangibles.
Whether this is in fact a sham or a clever legal loophole remains to be seen. However, this does demonstrate how hard the IRS is cracking down on the potential evasion of taxable income.
Ironically, one of Montoya’s teammates at Team Penske, Helio Castroneves, was also under investigation by the IRS. Castroneves was acquitted on felony tax fraud charges in 2009.
If you find yourself in a similar situation where you are unsure if your legal tax avoidance is on the borderline of being illegal tax evasion, we can help!