Prosecutors go after art lovers who cheat the tax collector

NEW YORK -- It is one of the worst-kept secrets of New York's fine art galleries: Ultra-rich art collectors who drop millions of dollars on paintings are illegally arranging with dealers to duck the sales tax.

But now, state and federal prosecutors are going after buyers and dealers with zeal.

This week, District Attorney Robert Morgenthau announced that 34 families had coughed up $6 million over the past year in back taxes on art purchases.

And in federal court, Samuel Waksal, the ImClone Systems founder and friend of Martha Stewart, pleaded guilty to conspiring with a dealer to dodge $1.2 million in sales tax on nine paintings that cost him a total of $15 million.

Morgenthau and his federal counterparts said their investigations are far from over.

"There appears to be a culture out there in which dealers and buyers think it's OK not to pay their taxes," said Morgenthau, adding that there are "a lot of fish out there that could be speared."

Prosecutors said buyers usually skirt the New York sales tax by making it look as if the art was sent out of state when it was actually intended to stay in the state. In some cases, dealers mail empty boxes out of state.

Waksal, for example, admitted arranging with a dealer to draw up bills making it appear his paintings were sent to a New Jersey address and were thus not subject to New York sales tax. The art -- including works by Mark Rothko, Franz Kline and William de Kooning -- wound up in Waksal's New York City apartment.

Art insiders and prosecutors say no one knows for sure how often such under-the-table deals are made and how much they cost the state in revenue. But the sales tax in New York City is 8.25 percent -- meaning a buyer taking home a $3 million painting could save nearly $250,000.

"There's an old saying in the art world: Everything is negotiable," said John Woodward, owner of Woodward Gallery in the SoHo district. "And the more money involved, the more it seems to happen."

Last June, former Tyco International chief executive L. Dennis Kozlowski was indicted on charges of evading New York sales taxes on $13 million in art, including works by Renoir and Monet. He pleaded innocent.

Waksal's plea could add as much as 10 years in prison to the sentence he receives for his part in the ImClone insider trading scandal. Art scammers can also face fines of hundreds of thousands of dollars for interstate fraud.

Prosecutors did not identify the gallery involved in the Waksal transactions, and no charges have been brought against a dealer. Published reports identified a gallery run by Larry Gagosian, a dealer well-known in New York art circles, as the one that handled the Waksal sales.

In a statement, Gagosian's gallery denied it took part in Waksal's illegal actions said it was "cooperating fully with the government and providing any additional information as needed."

Art dealers said the government's pressure is motivated in part by a weak economy that has states looking for quick ways to collect revenue.

Gilbert Edelson, vice president of the Art Dealers Association of America, said he expects many states to combat the practice by stepping up collection of a "use tax" -- a rarely enforced tax on items bought in other states.

Many dealers stressed in interviews that most of them are honest.

"It's not that art dealers are Boy Scouts. They're just careful by nature," said Mark Glimcher, president of PaceWildenstein gallery. "We have to be. We're dealing with objects that have to be what they say they are."

Prosecutors have made it clear that they are not going to ease up any time soon.

"Come and see us before we see you," U.S. Attorney James Comey declared in announcing the Waksal plea. "If the FBI comes knocking on your door, it will not be to admire your art."