A second criminal prosecution involving a prominent corporate executive has unfolded in New York as government officials crack down on schemes using false out of State delivery addresses to evade New York sales tax on art.
On 3 March, Samuel Waksal, former president and ceo of ImClone Systems, Inc., a biopharmaceutical company specialising in the development of cancer drugs, pleaded guilty in federal court to committing two counts related to wire fraud in a scheme to evade over $1 million in sales tax owed on more than $15 million in art. The works were bought from a Manhattan art gallery and shipped to Mr Waksal’s New York residence, using invoices falsely stating a delivery address at a New Jersey corporate facility.
According to Mr Waksal’s statements and to the criminal “Information”, a procedure used in place of an indictment when a guilty plea is entered, Mr Waksal bought numerous works of fine art from the Manhattan gallery from about June 2000 through about October 2001. These included works by Mark Rothko, Francis Bacon and Franz Kline, each purchased for $3 million or more, a De Kooning bought for $2.4 million, and others, to a total of $15.31 million.
Purchases of goods which are shipped out of State for use are not subject to New York sales tax. But the Information alleged, and Mr Waksal admits, that the works were delivered to and used at his Manhattan residence and therefore subject to 8.25% sales tax, a total of $1.263 million.
In pleading guilty to the charges before Manhattan U.S. District Judge William H. Pauley III, Mr Waksal admitted that he participated with the owner and principal manager of the gallery, and that the owner, not identified in the Information, provided him with fraudulent invoices omitting any sales tax and addressed to Mr Waksal at the address of an ImClone manufacturing facility in Somerville, New Jersey. But the works of art went to his residence in New York, he admitted. On each of the two criminal counts, Mr Waksal faces a maximum sentence of five years in prison and a fine of $250,000 or twice the gross gain or loss resulting from the offence.
In a State prosecution brought by the Manhattan District Attorney, L. Dennis Kozlowski, former chief of Tyco International, Ltd., was indicted in June 2002 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. Mr Kozlowski is seeking to dismiss the case, saying that only the seller can be criminally charged when sales tax is not collected (The Art Newspaper, No.134, March 2003, p.44).
On 5 March, New York District Attorney Robert Morgenthau said at a press conference that “There is a culture of art dealers and buyers who think it’s all right not to pay taxes.” According to Mr Morgenthau, 34 art collectors who all live in Manhattan voluntarily came forward and paid $6 million in unpaid New York sales tax on works of art, after the arrest of Mr Kozlowski. "People who come in voluntarily to pay the tax will not be criminally charged”, says Mr Morgenthau.
In October 2002, Mr Waksal pleaded guilty to various counts of securities fraud, conspiracy, obstruction of justice, perjury and bank fraud, relating to alleged illegal insider trading of ImClone stock.
The government made no plea agreement with Mr Waksal, and “the investigation of this matter is continuing,” said James B. Comey, U.S. Attorney for the Southern District of New York, and Kevin P. Donovan, Assistant Director in Charge of the New York FBI Office. Mr Comey praised the efforts of the FBI in the case and thanked the Securities and Exchange Commission for aiding the investigation.
In published reports, the New York Times and the Wall Street Journal identified the gallery which had sold the works to Mr Waksal as Gagosian Gallery of New York. But the Gagosian Gallery in Manhattan issued a statement saying that “Although the Gallery never comments about its dealings with individual clients, we have been aware of the investigation involving Sam Waksal for some time. We are cooperating fully with the government and providing any additional information as needed. While we understand Mr Waksal has admitted to evading State sales taxes, the Gallery was not complicit in his illegal actions and has not been named as a defendant.”
Originally appeared in The Art Newspaper as 'Amnesty for State tax evaders'