Federal court upholds judgment against ClassicStar

The U.S. Court of Appeals for the Sixth District in Louisville, Ky., on Thursday upheld a $66 million judgment against the ClassicStar Farms mare-lease program, its parent company, and three owners, the Associated Press reported. The federal court found that the sales and tax benefits of the program were “dramatically oversold,” and that the operators deliberately sought to mislead investors.

In 2011, U.S. District Judge Joseph M. Hood in Lexington, Ky., awarded damages and interest to a group of investors who sued ClassicStar and related parties. The investors had alleged that ClassicStar had failed to notify them that the Internal Revenue Service was investigating the mare-lease program. The IRS had raided ClassicStar’s Kentucky farm in 2006 and later alleged that the operation had allowed its investors to file more than $500 million in false tax deductions.

The ClassicStar mare-lease program was marketed as both an investment opportunity and a tax shelter, where investors leased the reproductive capacity of specific Thoroughbred mares. If a mare had a foal during the lease period, the investor(s) would own the foal; investors also could take deductions on their federal income tax returns for losses generated by the program.

However, in Thursday’s majority opinion, Sixth Circuit Judge Eric Clay wrote that during the mid-2000s, ClassicStar funneled investors’ money to its parent company, GeoStar, to fund mineral- and energy-exploration interests.

“By 2004,” Clay wrote, “the difference between the value of the mares owned by ClassicStar and the value of the mare leases sold to investors was approximately $270 million.”

ClassicStar filed for bankruptcy in 2007, and in 2009, ClassicStar co-founders David and Spencer Plummer pleaded guilty to tax fraud totaling $200 million in the IRS case.