Bill Romanowski couldn’t have played 16 years in the NFL by defying his coaches. When he retired from the NFL, he appears to have become more difficult to coach. That led to a $13 million investment loss, plus loss of deductions, according to a Tax Court decision yesterday. Yet the Tax Court didn’t tack on
personal foul accuracy-related penalties.
NFL players are notoriously bad at managing their money. One source says “By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.” Mr. Romanowski took a wise step to avoid this trap. From the Tax Court:
From the late 1990s until early 2004 petitioners employed a financial adviser, Kathy Lintz. According to Mrs. Romanowski, Ms. Lintz “Basically * * * took care of everything” regarding petitioners’ finances, including managing their portfolio and allocating them a monthly stipend. Ms. Lintz also collected relevant information from petitioners in order to have their tax returns prepared by a certified public accountant (C.P.A.) and reviewed the completed tax returns before sending them on to petitioners. Ms. Lintz is a certified financial planner, but she is not an accountant or an attorney.
As a result, the Romanowskis faced retirement with the ability to finance a $13 million investment. Then they decided to defy their coach.
According to the Tax Court, Ms. Lintz referred the Romanowskis to an attorney, a Rodney Atherton with Greenberg Traurig, LP, to deal with tax issues arising from a real estate investment in Colorado. That’s where things started to go wrong.
During October 2003 Mr. Romanowski met with Mr. Atherton at the Greenberg Traurig office in Denver. At the meeting they discussed petitioners’ real estate investment issues as well as certain other issues. Mr. Atherton told Mr. Romanowski about a horse-breeding business, ClassicStar, which had retained Greenberg Traurig in July 2003 in connection with certain transaction and tax issues, including review of a tax opinion ClassicStar had received from another law firm. ClassicStar was working with Mr. Atherton, among others at Greenberg Traurig, to review the tax opinion.
Unfortunately, according to the Tax Court, the attorney wasn’t just looking out for the Romanowskis:
Although he testified multiple times to the contrary, the evidence is clear that Mr. Atherton received improper payments from ClassicStar as a result of petitioners’ choosing to enter the program. Mr. Atherton claimed that multiple documents regarding payments he received from ClassicStar were sent to him (from ClassicStar) in error. Many of those documents were chain emails which contained conversations between Mr. Atherton and ClassicStar employees in which Mr. Atherton used terms such as “fee splits” and “percentage” when discussing the amount of money ClassicStar would pay to him or Greenberg Traurig for bringing people into the program.
The Romanowskis fell in love with the horse program, which appears to have been intended as a tax shelter from the outset, what with “NOL illustrations” for net operating loss refunds being provided in the process.
The financial planner saw it that way:
On February 4, 2004, Ms. Lintz resigned as petitioners’ financial adviser, partially because of petitioners’ investment in the program. Ms. Lintz’s resignation letter states that petitioners choose to “enter into an aggressive tax shelter”, presumably the [ClassicStar] program.
In other words, the Romanowskis stopped listening to Ms. Lintz’s coaching and called their own play, investing $13 million into ClassicStar (much of it borrowed). The rest is just predictable details. The program never had the thoroughbred horses that it claimed, using most of the funds to breed less-desirable quarterhorses — and the Romanowskis went along. Over time the program went bust and the Romanowskis lost their investment. And now, they have lost their tax deduction on hobby-loss grounds, with the Tax Court upholding a $4.4 million deficiency.
The judge cut the Romanowskis slack on the penalties, though, apparently based on his belief that their attorney had a conflict of interest in advising the Romanowskis about the horse investment:
While a taxpayer familiar with the field of tax would have done several things differently from petitioners, petitioners were not sophisticated or knowledgeable in the field of tax. Petitioners had good reasons for the trust they placed in Mr. Atherton.
Decision for IRS, except for penalties. And a “notify the carrier” moment for Greenberg Traurig.
The Moral? Professional football may not be the best training for investments. And when the coach tells you to run the play as called, there’s probably a good reason.