The nuts and bolts of Helio's complicated tax case

If we are to believe the Internal Revenue Service, Castroneves also thought he could take on the U.S. Department of Treasury. And instead of devising a race car

If we are to believe the Internal Revenue Service, Castroneves also thought he could take on the U.S. Department of Treasury. And instead of devising a race car strategy or a dance routine to do so, Castroneves allegedly helped to mastermind an elaborate tax fraud scheme involving unusual financial instruments in Panama and the Netherlands. That allegation has led to a Miami courthouse, where U.S. District Judge Donald Graham is presiding over a criminal case that features three defendants: Castroneves, his sister/former business manager Katiucia Castroneves, and their lawyer, Alan Miller, all of whom are accused of conspiring to defraud the United States and engaging in income tax evasion.

A conviction would do more than ruin Castroneves' career. He would face up to six and a half years in prison and, as a non-U.S. citizen, possible deportation upon his prison release. He would also be subject to losing his contract with Penske Racing and any product endorsement contracts; those companies could even seek to recover payments already made to him.

At its core, the prosecution's case against Castroneves rests on whether he willfully used a Panamanian bearer share corporation called Seven Promotions to hide taxable income. While by no means proof of wrongdoing, the use of a Panamanian bearer share corporation routinely triggers suspicion. These corporations are viewed as excellent devices to protect assets and to obtain unparalleled financial privacy. They can be created without producing a public record of the incorporating party's name, their shares omit any identifying information about shareholders, and a person with a controlling interest can direct corporate assets to purchase various property and goods, such as real estate and cars, with minimal risk of personal detection.

Critics of bearer share corporations often discredit them as shell corporations which illegally conceal taxable income from tax collectors. Particularly given the lack of public disclosure required of their activities, these Panamanian corporations can offer relatively easy manipulation for nefarious ends.

Seven Promotions was created and controlled by at least one member of Castroneves' family, but possibly not by Castroneves himself. The aforementioned legal privacy afforded to bearer share corporations has made untangling Seven Promotions' true ownership and control difficult.

The prosecution contends that Castroneves, his sister, and at least one other family member created and controlled Seven Promotions, which Castroneves allegedly used to camouflage about $480,000 in taxable income. The defense -- led by famed criminal defense attorney Roy Black (former counsel to William Kennedy Smith and Rush Limbaugh) -- instead insists that Castroneves' father, Helio Castroneves, Sr. created and controlled the company, and thus any money received by it was not taxable to the son.

Adding another layer of complexity is the role played by Castroneves' lawyer, Miller. Under Castroneves' contract with Penske Racing, Seven Promotions was to receive $5 million in income, about $1.5 million of which needed to be withheld under U.S. tax laws. The prosecution charges that Castroneves, his sister, and Miller devised a scheme whereby Penske Racing would be misled into depositing the income in Fintage Licensing, an offshore Dutch company, without withholding any income. With his $5 million tucked away in the Netherlands, Castroneves would eventually move from the United States to a tax-haven country, such as Andorra or Monaco, where residents pay no income taxes.

A lack of withholding is technically allowable under a certain type of deposit -- a deferred royalty plan -- though payment of taxes is only delayed, rather than avoided. As allegedly explained by tax advisers to the three defendants, a deferred royalty would be illegal if Castroneves owned or controlled Seven Promotions, since redirecting income from it would suggest an intention to evade paying taxes.

Besides, the prosecution argues, under federal tax law's "constructive receipt doctrine," Castroneves was likely obligated to pay taxes when he obtained a right to receive immediate payment of taxable income, meaning a refusal to receive his Penske income would not immunize Castroneves from paying taxes on it. The constructive receipt doctrine is designed to preclude taxpayers from manipulating the timing of income receipt for their own benefit. According to the prosecution, Miller, acting under the auspices of Castroneves, misled Penske Racing about Castroneves' role in Seven Promotions and wrongly instructed the racing company to deposit the income in Fintage Licensing.

To be sure, this is a complicated tale, and one that also includes side issues, including whether Castroneves made improper business deductions and failed to report in-kind gifts.

The key for Castroneves, however, is whether the government can prove, beyond a reasonable doubt, that Castroneves had any material role in Seven Promotions. Black -- Castroneves' lead counsel -- argues that Castroneves did not organize the corporation, possess its shares, or serve as an officer. Instead, according to Black, Helio Castroneves, Sr. owned and operated Seven Promotions, without any role played by his son or daughter. The cloaked nature of the bearer share corporation may advance Black's case.

More generally, Black maintains that Castroneves -- focused on his career rather than his money -- lacked awareness as to his finances and did not appreciate far-away business dealings in Panama and the Netherlands. Black also claims that even when presented with opportunities to learn about his finances, Castroneves apparently lacked the interest and capacity to understand them. As a result, Castroneves signed papers without understanding their meaning.

Bolstering this defense is that other drivers, including Eliot Sadler of Sprint Cup, have complained about convoluted verbiage found in racing contracts. Keep in mind, if the jury concludes that Castroneves lacked financial understanding, he would be poised to escape conviction: tax evasion requires the prosecution to prove that Castroneves willfully evaded taxes; if he was unaware that certain payments must be treated as taxable income, then he could not have committed tax evasion.

Based on data, however, the chance of Castroneves succeeding is slim. Prosecutors obtain convictions in over 90 percent of tax evasion cases, with some estimates claiming a prosecutorial success rate as high as 97 percent.

Then again, generalized data may not be as relevant for Castroneves -- a celebrity and millionaire -- as for typical defendants. Along those lines, Castroneves has retained a high-profile criminal defense team, which has enjoyed notable successes in previous celebrity cases. Most defendants, in contrast, can't afford a legal dream team, let alone one of high-profile.

Castroneves' celebrity reputation may also help him with the jury. Anecdotal evidence, as well as findings from social psychology, suggest that jurors are often awed by the sight of celebrity defendants, particularly charming and likeable ones. Castroneves, known for his humor and sanguine demeanor, might be positioned to enamor the jurors who will decide his guilt or innocence.

Or maybe he won't. As Wesley Snipes, who was recently sentenced to three years in prison following his conviction on failing to file tax returns, might tell him, charisma can only take you so far.

SI.com legal analyst Michael McCann is a law professor at Vermont Law School and the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law. He is a former chair of the Association of American Law Schools' Section on Sports and the Law.