U.S.A. vs. Larry Gagosian
by Gary Comenas/2003
The taxes and penalties that the U.S.A. alleges are owed to them by Larry Gagosian and others stem from the sale of paintings from the Richard Weisman Collection of modern art to Thomas Ammann Fine Art A.G. in 1990 by a company set up by Larry Gagosian and Peter M. Brant.
On January 18, 1990, Peter M. Brant and Larry Gagosian formed the Contemporary Art Holding Corporation (CAHC), incorporated in the state of Texas. Gagosian owned 51 % of the shares and was President and Director of CAHC. Brant owned the remaining 49% of the shares and was Vice-President, Treasurer, Assistant Secretary and Director.
On January 23, 1990, CAHC bought all the outstanding shares of a company called Lerand for in a tax-free merger of the two companies. Lerand was a corporation originally set up by Richard Weisman. Lerand's only assets were Weisman's 62 paintings. After the merger CAHC owned Lerand and, therefore, the paintings.
On February 15, 1990, Thomas Ammann purchased 58 of the 62 paintings from CAHC. The U.S. claims that this transaction provided capital gains earnings of $17, 984,484.53 for CAHC. It is the tax on this amount, plus penalties, that CAHC never paid. The reason that CAHC did not pay the taxes on the capital gains earnings was because CAHC no longer had any assets.
The U.S. claims that CAHC did have assets at the time - the four 'leftover' paintings of the Richard Weisman collection that were not sold to Thomas Ammann. They were: Roy Lichtenstein's Blonde Waiting (1964), Clyfford Still's Untitled R #2 (1947), Barnard Newman's Onement #6 (1953) and Mark Rothko's Green-Blue (1957). The U.S. alleges that 'the defendants conceived and structured the transaction to transfer valuable art work into their hands, while purportedly leaving CAHC without assets to pay its millions of dollars of tax liability."
But what did actually happen to these four 'leftover' paintings?
On April 7, 1992, after the IRS demanded payment for taxes due by CAHC for the 1990 fiscal year, the Newman and Rothko paintings were "transferred" to a company called GJK for $10.00, as a "dividend in kind". GJK then sold the Rothko for $1,600,000 to C & M Arts in New York in June of 1993. GJK was a corporation that was solely owned by J.W. Kent. J.W. Kent was also the corporate secretary of CAHC when it was first created on January 18, 1990.
In regard to the Newman painting, Brant had obtained from CAHC on February 15, 1990 an option to purchase the painting, "exercisable no later than February 15, 1995." Brant then took the painting home. On July 15, GJK sold the Newman painting to the Machalite Foundation of Liechtenstein for $2,250,000. The IRS alleges in its complaint that in so doing, Kent and GJK "intentionally transferred an asset overseas to avoid seizure by the IRS."
The paintings by Roy Lichtenstein and Clyfford Still were leased to Larry Gagosian with an option to buy them. As of 1990, according to the U.S. complaint, "Gagosian Gallery listed among its inventory the Lichtenstein and the Still." On or about September 30, 1996, Gagosian sold the Still painting for $2,250,000 and used the proceeds to acquire two other paintings: Frank Stella's Fugita and Eric Fischl's Far Rockaway.
As for the Lichtenstein painting, Gagosian maintains that he does own the painting, but that his ownership of it predates the IRS's lien on the painting.
On February 15, 1990 - the same day that Thomas Ammann purchased the 58 paintings from CAHC - Brant and Gagosian both sold their shares in CAHC to GJK, resigning as officers and directors of CAHC making GJK the sole shareholder in CAHC, with J.W. Kent the sole Director and President. As they were no longer legally associated with CAHC, they were not liable for the taxes. The U.S. alleges, however, that Gagosian and Brant used their positions prior to their resignation of February 15, 1990 to "enrich themselves and purportedly to leave CAHC with no assets with which to pay its tax liabilites. They purportedly sold, transferred or encumbered three of CAHC's only remaining assets - the Lichtenstein, Still and Newman paintings - for consideration that was not fair, despite the fact that CAHC owed millions of dollars in tax liabilities to the IRS."
The government also alleges that Gagosian "agreed to indemnify CAHC and GJK for one-half of the United States taxes owed on the sale of CAHC's paintings." They are asking the court to set aside and/or declare fraudulent and null and void "any purported transfer or sale of the Lichtenstein, the Still, the Rothko and/or the Newman paintings, or any rights in those paintings, from CAHC to Gagosian, Gagosian Gallery, Kent, GJK, Brant or any other person or entity..." And if the paintings have already been sold to "bona fide" purchasers, the government is seeking judgment for the United States against the defendants for an amount to be determined at trial. The government is also asking for the Lichtenstein painting currently held by Larry Gagosian to be surrendered to them.
Gagosian is also being investigated in relation to art purchases made by ImClone Systems Inc. founder Samuel D. Waksal. On March 3, 2003, Waksal pleaded guilty in federal court to two wire fraud counts in a scheme to evade over $1 million in sales tax owed on more that $15 million of art. The works were allegedly bought from the Gagosian Gallery of New York and shipped to Waksal's New York residence, allegedly using invoices falsely stating a corporate delivery address in New Jersey. On each of the two criminal counts Waksal faces a maximum sentence of five in prison and a fine of $250,000 or twice the gross gain or loss resulting from the offence.
The illegal practice of avoiding sales tax by having paintings delivered to an out of state business address had been highlighted the previous year with a similar scandal involving L. Dennis Kozlowski, the former head of Tyco International. In June 2002 the Manhattan District Attorney indicted Mr. Kozlowski for allegedly "conspiring to avoid New York sales tax by causing paintings bought in New York to be 'delivered' to Tyco headquarters in New Hampshire before arriving at his Fifth Avenue residence." (The Art Newspaper/March 2003/p.4)
Although Mr. Kozlowski is seeking to dismiss the case, the New York District Attorney, Robert Morgenthau, referred to it in comments he made at a press conference on March 5, 2003 when he said "There is a culture of art dealers and buyers who think it's all right not to pay taxes." He then went on to note that 34 art collectors living in Manhattan voluntarily came forward and paid $6 million in unpaid New York sales tax after the arrest of Mr. Kozlowski, adding that "people who come in voluntarily to pay the tax will not be criminally charged."
At the time that Gagosian was being investigated in the Waksal case, he issued a statement saying that he was "cooperating fully with the government and providing any additional information as needed." So far, no criminal charges have been brought against Gagosian in this matter and it is unrelated to the CAHC lawsuit brought by the federal government.
The Gagosian Gallery has also issued a statment in regard to the civil lawsuit which the government has brought against them, saying that the federal government's lawsuit was due to "a long-standing dispute over title to three specific works of art. For over the past 10 years the Gallery has had cordial and open discussions with the IRS in good faith efforts to resolve the issue. There is and was no secret scheme or effort to evade taxes by the Gallery," adding that the government's "belated attempt to hold the Gallery and Mr. Gagosian responsible for the unpaid taxes of others is without legal or factual support and will be aggressively defended."