On 19 March, the US filed a civil lawsuit against the dealer Lawrence Gagosian, Gagosian Gallery, and others seeking to recover $26.5 million in federal income taxes which the US alleges are past due for over a decade from a shell company which the defendants used to buy and sell art and then stripped of its assets, leaving the company unable to pay the tax.
The taxes on about $17 million of capital gains arose on a one-day transaction, in which the company bought 62 contemporary paintings from Richard L. Weisman through his California corporation, Lerand Inc., for $32 million, then sold 58 of them for $20 million to Thomas Ammann Fine Art A.G. of Zurich. The transactions took place on 15 February, 1990 at the Manhattan law office of Jay I. Gordon, who structured the deal, the US says. Subsequent steps “fraudulently conveyed” CAHC’s remaining assets out of the shell company, leaving it “with no assets to pay its taxes,” the US says.
The shell company, Contemporary Art Holding Corporation (CAHC), was created by Larry Gagosian, Peter M. Brant, and Jay I. Gordon. In the end, Mr Gagosian and Mr Brant ended up with leases and purchase options on three multi-million dollar paintings by Roy Lichtenstein, Clyfford Still, and Barnett Newman, says the US. Another defendant, GJK, Inc., ended up owning all of CAHC and later received the Newman painting and a valuable painting by Mark Rothko as a dividend, the US says.
In 1993, the US Internal Revenue Service served a levy on Mr Gagosian for the Lichtenstein and Still paintings for the taxes, but Mr Gagosian failed to honour it, the US says. The government is alleging that Mr Gagosian, Brant, and Geoffrey J.W. Kent, another co-defendant and owner of GJK, “acted as the alter-egos” of the art-selling corporation “and should be held personally liable for its tax obligations.”
The Gagosian Gallery issued a statement on 20 March saying that the government’s lawsuit pertained 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.” 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,” the statement said. But the US says that Mr Gagosian, Mr Brant, and Mr Gordon, with “full understanding of the tax consequences” for CAHC, “conceived and structured the transaction to transfer valuable artwork into their hands” leaving the company, which admits it owes the tax, without the cash to pay it. The US is also seeking to undo the conveyances of the four remaining paintings to the defendants as “fraudulent,” to make the works of art subject to the tax liens.
Initially, Mr Gagosian was the 51% shareholder of CAHC, the IRS says, with the remaining 49% held by Mr Brant, a collector and real estate developer in Greenwich, Connecticut, who is also owner and director of the Greenwich Polo Club. Each contributed half a million dollars which was used to make a down payment on the $32 million purchase of Weisman’s company Lerand. CAHC operated no independent business and was merely an instrument of the defendants, the US says.
The sale was structured as a tax-free corporate “merger,” in which CAHC bought all of Lerand’s stock rather than buying the paintings, meaning that taxable capital gain on the resale of the paintings was carried over to CAHC.
Some of the steps allegedly taken in the highly complex transaction included Mr Brant’s sale to GJK of the CAHC stock he had just purchased, followed by GJK’s cancellation of Mr Brant’s debt to it for having just borrowed the money to buy the stock. The US also cites Gagosian’s sale of his CAHC stock to GJK on a promissory note, at the same time as entering into an art lease agreement. The monthly interest rates payable by GJK on the promissory note to Mr Gagosian equaled the monthly charge to be paid by Mr Gagosian to GJK for leasing the Lichtenstein and Still paintings, $41,425.
CAHC reported on its federal income tax returns that it owed about $6.7 million in tax on the transactions, but paid nothing.