Broad or narrow: Taxman reviews “Private” Museums

By David Honig, Esq.*

screen-shot-2016-11-23-at-1-48-18-pmLast year, on November 20, 2015, Senator Orrin Hatch (R-Utah) launched a review of eleven US private museums in response to a recent New York Times Article that exposes a possibility for abuse of 501(c)(3) nonprofit status. Every “domestic or foreign organization described in section 501(c)(3)” is considered a private foundation, unless it fits into one of four scenarios, dealing with where the organizations “support” is derived, set out in § 509(a).  Senator Hatch’s investigation did not include all nongovernment owned museums as the term “private museum” suggests – after all many of the most renowned museums in the United States, such as the Metropolitan Museum of Art in New York and the National Gallery of Art in Chicago are private museums even if they are not thought of as such. Instead, Senator Hatch looked into a subset of museums that only have one donor and are designated private foundation under 26 U.S.C. § 509.

The investigation, which concluded in May of 2016, sought to determine whether, and how much, these museums benefit the public. This inquiry was ignited by the fear that these private foundation museums are offering minimal benefit to the public while affording the donors substantial benefits including tax deductions. For example, the New York Times article mentions that at least two of these museums, Glenstone in Potomac, MD and the Brant Foundation Art Study Center in Greenwich, CT, require reservations and “[are] open only a few days a week to small groups.” The reason this matters is the tax advantages afforded to charities with 501(c)(3) nonprofit status are granted because of the public benefit these organizations provide. Logic suggests, if these museums are not providing a public benefit they should not be given preferential treatment. The real issue is not whether these museums provide a public benefit but whether the benefit provided can justify the private reward. In other words, should individuals capable of purchasing multi-million dollar artworks be afforded a discount on creating and maintaining private viewing salons?  Before determining whether these museums provide enough or any public benefit some background should be given, first on the museums themselves then on the tax benefits associated with this setup.

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The Private Museums

The United States has a long history of encouraging private enterprise. This can be seen in airlines, railroads, institutions of higher education and charitable organizations. The investment of private capital helps alleviate some of the financial strain felt by the state, while encouraging private organizations or individuals to provide public services. Seeking to reward private investment for the public good, “Congress sought to provide tax benefits to charitable organizations, to encourage the development of private institutions that serve a useful public purpose or supplement or take the place of public institutions of the same kind.”

One way Congress provided tax benefits to charitable organizations was by creating 26 U.S.C. § 501. Section 501(a) grants tax exempt status to certain organizations. Relevant here are corporations “organized and operated exclusively for … charitable … or educational purposes … ”. Seeking to take advantage of this section of the internal revenue code collectors have created organizations and donated artworks to them in order to establish museums for their private collections.

The Tax Scheme

One benefit of creating a nonprofit organization and donating artworks to it is clear – if the museum charges an entry fee the revenues can be used to maintain the artworks and space without the donor having to pay taxes. By relinquishing ownership of these works the donor no longer bears sole responsibility for upkeep. Since 9 of the 11 museums surveyed by Senator Hatch do not charge an admission fee, most of the founding donors have to donate more funds to insure the works and premises do not deteriorate. On its face, the free admission scheme is detrimental to the founding donor. In addition to paying for the upkeep, although possibly at a subsidized rate, the founding donor must also relinquish control of the works to the nonprofit corporation for the corporation to be eligible for the tax benefits under the internal revenue code.

Taking these issues in turn, the first, having to pay for upkeep, could actually be a benefit. The internal revenue code, specifically section 170, allows a donor to deduct a “contribution or gift” made to, among other organizations, corporations that qualify for 501(c)(3) tax exempt status. This means that besides possibly paying a reduced rate for the upkeep and maintenance of her art and a facility to house said art, the founding donor can deduct the amount donated to the museum to cover these costs.

In addition to allowing deductions for contributions section 170 also allows a donor to deduct gifts made to authorized organizations. By converting a collection that was privately owned by an individual into one that is held by a museum for the “public’s benefit” the founding donor can use money that would have been personally spent for upkeep of the art to reduce her taxes. By combining tax exempt status granted by 501 with the deductions afforded for charitable contributions in section 170 a founding donor is duly rewarded. Note: the internal revenue code places a limit, usually 50% of gross income, on the amount of deductions a person can take each year for charitable donations.

Tax deductions are not the only reason for a founding donor to entertain creating this type of organization. Once the works are donated the museum owns them and a donor no longer has no control, or so it would seem. If the donor serves on the board of directors, acts as president or serves in some other executive position the donor could execute control over the works of art. In fact, this is exactly what “many” of the founding donors are doing. An example of this is the Broad in downtown Los Angeles, whose founders Eli and Edythe Broad serve on the Board of Governors.

A donor that serves on the board or as an executive will be involved in not only how the artwork is managed but more importantly the operations of the museum. This includes determining hours of operations, admission price, what works should be bought and sold, displayed, put into storage or on loan. It is easy to see why Senator Hatch was worried about abuse of these tax exemptions since donors are able to reap huge tax benefits while seemingly giving up little in their enjoyment and control of art. In fact, some of the museums surveyed said that they are located on land owned by or partially by the founding donor. In other instances, museums are located on land adjacent to the donor’s residence. In order for this scheme to make sense and continue the public must get some benefit.

Public Benefits

“[C]harities [are] to be given preferential treatment because they provide a benefit to society.” It follows, that if there is no benefit to the public then the charity should not be given preferential treatment and a donor should not be allowed to receive tax deductions for donations to that charity. But the issue here is not one of existence of benefit it is one of degree of quality and quantity of benefit. The question ultimately boils down to whether or not these museums provide enough public benefit to be given preferential treatment and how is that determination made. In other words, what is the required level of public benefit that an organization must produce in order to receive preferential tax treatment under section 501 and how is it determined?

Unfortunately, it is hard to determine whether action actually benefits the public and the Internal Revenue Service (“IRS”) guidelines are not very helpful on this front. Besides being open to the public for viewing and informing the public of access, it really is not clear what is required of an organization to achieve tax exempt status.

There are clear benefits to founders of private museums but the question remains are those benefits enough. For instance, of the 11 museums that received a letter from Senator Hatch 10 of them responded that they engage in or have engaged in loan programs. This means that a work of art that would normally be displayed in someone’s home or sit in storage was put on display for a large number of people to see. The creation of more museums allows works to be displayed that otherwise would sit in a basement or storage facility and never be seen by the public.  

Not only does the creation of more museums allow for more work to be shown it allows different work to be shown and curated in different ways. Private museums allow the whims of one person to dictate how and what art is acquired and later displayed. This type of museum does not have to focus on what it thinks would be the most educational exhibit for its visitors as traditional public museums do. Instead the exhibits can focus on art or whatever emotion or reaction a curator wants to provoke. This too is “educational” in its own right even though it is not designed with that purpose in mind.

Maybe the best example of this would be Eli and Edythe Broad’s Broad Museum in Los Angeles, California. The Broad is the poster child for what these types of private museums can be. It is open most days of the week and draws large crowds of young people. In addition to its visitors having a lower average age than the national average of museum goers, 32 compared to 45.8, as of March 2016 70% of the Broad’s visitors were younger than 34 years old.

The Broad represents what these museums can be, but just because others do not do as much as the Broad does not mean they do not do enough to benefit the public. The limited hours and days of operation and reservations requirements can be justified: the founder wanted to create unique and more intimate experiences for visitors. Should it matter that this type of public benefit is intangible?

Ignore for a second the obvious benefit of public access to these artworks. Also ignore the limited circumstances some of the museum allow the public access to these works – a reason for reduced access might be that these museums are new and the operating expenses associated with keeping more traditional matters currently do not make sense because of number of guest expected. How is it determined whether the public receives enough or any benefit at all? Maybe the benefit is not clear or scientific, maybe it is indirect, or maybe it will take years to manifest but once it does it will be incalculable. The fact is public benefit can be difficult to pinpoint.

This difficulty is reminiscent of a Copyright issue raised over 100 years ago. When approached with the question of whether an advertisement could be protected under copyright law in Bleistein v. Donaldson Lithographing Co., Justice Holmes pointed out that judges should not determine the worth of “pictorial illustrations”. His reasoning, which boils down to the tastes of any portion of the public should not be looked down upon. Following that logic, maybe Congress, the IRS or a court adjudicating the issue of public benefit should determine that if any portion of the public benefits from an organization that organization should be allowed to keep its tax exempt status.

 *  *  *

Note: This Article is being reprinted with the permission from Entertainment, Arts and Sports Law Journal, Fall 2016, vol. 27, no. 3, published by the New York State Bar Association, One Elk Street, Albany, New York, 12207

*About the Author: David Honig is a member of the Brooklyn Law School Class of 2015. While attending law school he was a member of the Brooklyn Law Incubator & Policy (BLIP) Clinic. He is admitted to New York and New Jersey state bars. From 2015 to 2016 he served as a postgraduate fellow at the Center for Art Law. David is currently pursuing an LL.M. in taxation from NYU Law.

Donating Art – Not as easy as you may think…

By Aaron M. Milrad, first published on the Dentons website on 2 April 2015.

Owner

In advising potential art donors I find my clients are surprised when I ask “Are you the owner of the art?” At times there is no quick or obvious answer. Who was the buyer of the art? Who was listed on the Bill of Sale? Is it you, your spouse or your corporation? What if you and your spouse are no longer married and living together, but the Bill of Sale shows that the artwork was sold to Mr. and Mrs. X? Who can donate it? Keeping the original Bill of Sale is an important aspect of donating art as a museum or art institution will ask you to sign a Deed of Gift confirming that you are the owner of the art and have authority to donate it.

The deed of gift

The Deed of Gift will also ask you to warrant that the artwork is free and clear of any encumbrances; that is, that you have not pledged it to the bank for a loan or an ongoing loan agreement and that no creditor has filed any claim against your assets, including the artwork.

It is also common for the Deed of Gift to ask, and have you confirm, that the artwork has not been imported into Canada in contravention of any cultural property laws of the country of origin of the artwork (a Mexican object, as an example) or in contravention of Canadian law.

Canada is a signatory to UNESCO Convention dealing with the rules for importing and exporting of cultural property from member states.

Where to donate?

Mandates of collecting differ significantly from one institution to another. Selecting the right institution is important as the donor does not wish to be embarrassed by having an institution refuse the work as being outside its mandate. For example, the George Gardiner Museum of Ceramic Art collects only ceramics and related material. Other museums may collect only Canadian art or military art – or may not collect at all and may only exhibit art on loan.

Institutions will consider other factors:

  1. How important is the artwork;
  2. How the work fits into its collection;
  3. The size of the work;
  4. Whether it can be easily accommodated in storage; and
  5. How often the institution will want to show the work to the public (that is, its importance as art).

Your personal appreciation of the work in question does not necessarily make it an important work for an institution to receive as a donation. There must be a value and a relationship to the institution’s existing collection to warrant its acceptance of the work. You should ask the institution in advance as to its mandate and what the institution may be looking for in the way of art donations.

Donation of money

It is not unusual for an institution to tie its acceptance of the art donation to a requirement that the donor also contribute money to help cover the cost of “the care and feeding of the artwork”, and/or the cost of independent appraisals by professional appraisers to establish the fair market value of the art donation that will be reflected on the donor’s tax receipt. Often times, such a monetary contribution can be made to the institution for its general purposes. Care has to be taken to avoid direct or directed payment to the appraisers, as this may not qualify as a donation for income tax purposes.

Fair market value

If a tax receipt is requested or required, the artwork must be valued by independent appraisers at or near the time of the donation. Sometimes the curator of the institution itself may appraise the work. If the artwork has an original cost and a current value less than $1,000, there is no tax ramification for a capital gain under the Income Tax Act.

“Fair market value” is not defined in the Income Tax Act. However, it has been established by various court decisions as being the highest price an artwork is expected to bring in the context of willing buyers and willing sellers in the appropriate “sales market” applicable to that artwork, and under no compunction to transact. Often times, in seeking to quantify the artwork’s value, the tax authorities will look at the original price paid by the donor as the starting point, as well as the qualifications of the independent appraisers who valued the artwork.

Acceptance

Many institutions will require that the donation of the artwork be approved not only by the relevant curator, but also by an acquisition committee or even by the institution’s board of trustees. This is not a quick process. Usually, acquisition committees sit only three or four times a year. If timing of acceptance of a donation of artwork is important for tax reasons (i.e. the receipt is required for a particular tax year), sufficient time has to be given to the institution to process the artwork for donation in accordance with the rules of the institution and the tax authorities.

The institution must be a ‘charitable organization’ in order to issue tax receipts. It will not wish to put its status in jeopardy for having a faulty donation acceptance program.

Certified cultural property

A donation may be made by a collector to an institution under normal donation rules for a tax receipt for fair market value of the artwork. However this process will result in a taxable capital gain to the donor based on the increased value of the work from the time of purchase to the time of donation. There may be different tax issues for an art donation made by an art dealer, or artists donating their own artworks, but that is outside the purview of this article. However, an art donation made under Canada’s Cultural Property Export Import Act may qualify for a special benefit given to the donor.

The European VAT: Good for Tax Revenue, Bad for the Commercial Art Market?

by Elizabeth R. Lash, Esq.

As an American, one might be forgiven for assuming that Europe, with its traditional support for the arts (at least, as a cultural phenomenon), would be equally supportive in its tax regime for the same. While in some limited instances, the European Union continues to provide a more favorable regime for the independent artist, the trend towards an ultimately higher value-added tax (“VAT”) on the sale, import and export of artwork, particularly with respect to art sold by galleries and in the resale market, may discourage the growth of an EU-wide commercial art market in comparison with more favorable tax regimes outside the EU.

VAT was initially intended to be used as a single tax rate applicable to all goods and services across all European Union member states. While the standard rate was originally set at 15% in 2006, member states could theoretically request reduced rates in one or two categories, set at no less than 5%. In reality, as each member state negotiated the terms of its entry into the EU, the list of categories has expanded to at least 21, with rates above and below the standard rates (which already varies from 17% to 27%), along with multiple categories of rates below 5% (zero rates, “parking rates” (i.e., rates negotiated with entry into the EU), and super reduced rates). As well, categories of rates are inconsistently drawn, from too narrow to overly broad: it includes, among others, such categories as printed books, e-books, cultural institutions, household cleaning, sporting facility use, bicycles, and writers and composers.

When it comes to artwork, VAT rates vary widely, ranging from 5% (Malta) to 25% (Sweden) (although there is a reduced rate for independent artists’ sales). In addition, VAT may be calculated on the margin (i.e., the difference between the original sale price and the purchase price), instead of under the standard or reduced rate (whichever is applicable to artwork in that particular member state). In a number of member states, the VAT may be set at multiple rates: one for independent artists; another for galleries and dealers; and still another for the import or export of art.

Further complicating this picture, the EU Commission may not only pressure (or even sue) a member state as to the categories for which reduced rates are permitted, but may also regulate individual tax cases affecting artists and collectors. One example in particular is the Flavin case, whose outcome confounded the international art community (and sets an unfavorable precedent in future, similar circumstances). In 2006, a British gallery (named the “Haunch of Venison”) imported two well-known American conceptual artists’ sculptures: Dan Flavin’s light sculpture, and Bill Viola’s video installations. The former consisted of several tubes of fluorescent lights, while the latter consisted of several audio-visual productions playing on various projection screens. The British customs office imposed a 20% rate instead of the reduced 5% rate for artwork. However, upon appeal to the British VAT and Duties Tribunal (the “Tribunal”), the reduced rate was re-instituted in 2008.

But despite this local regulator’s final decision (with no further appeal by the parties to the EU courts), the EU Commission weighed in anyway with its own regulation, issued in September 2010, which specifically overturned the Tribunal’s decision, ostensibly to effectuate the uniform taxation rules on imported goods. The EU Commission found that it was not the installations themselves which constituted artwork, but the results of such installations, whether of the “light effect” of Dan Flavin’s light sculpture, or the videos screened on Bill Viola’s video installations. Thus, in effect, the EU Commission found that the installations should have been taxed just as if a hardware or electronics store had imported lightbulbs and video components. For conceptual artists, this represented a major blow to the sale in and import of their artwork into Europe.

Then take Germany. Germany formerly assessed a reduced VAT of 7% on sales of art (other than photography). However, due to pressure from the EU Commission, which had opened proceedings against Germany regarding this reduced rate category, Germany passed legislation to raise the rate to 19%, effective January 1, 2014 (Germany’s standard VAT rate since 2007). In response, German federal legislators passed a national directive that permitted the tax to be assessed on only 30% of the purchase price, relying in part on an exception to the VAT directive that had been used in France for several years. But the application of this directive was restricted less than a year later by the German states to artwork priced under 500 Euros, and a few other categories, essentially undercutting the law’s essential purpose—to provide a more favorable rate for the commercial art market. Meanwhile, artists selling out of their studios remain subject to the 7% rate. While this may be acceptable for those select artists who sell out of their own studios, it does not bode well for those who are represented by galleries.

In 2014, in another instance of muddying the tax waters, the French government increased VAT on the sale of art in France from 7% to 10%, while still permitting imports of non-EU artwork to be taxed at 5.5%. Only a year later, the French legislators acknowledged this inconsistency, and reduced the VAT on direct sales by French artists to 5.5%, effective January 1, 2015. Meanwhile, in Spain, the current VAT on artwork was raised from 8% to 21% in September 2012, initially as part of the general rate assessed on goods and services related to “culture.” Within a year, after much hue and outcry, Spain decreased the rate again to 10%. Meanwhile, in Italy, the VAT on the sale and import of artwork is still 22%.

The dust may eventually settle on the various VAT rates and their application, but the newest wrinkle is a regulation (Council Implementing Regulation (EU) No 1042/2013) which changes how VAT is assessed—from the place of supply to the place of purchase. While this does not affect traditional visual artists and sculptors, it does impact those who are considered to supply services or goods digitally to consumers—for instance, freelance website designers. The regulation, effective January 1, 2015, requires such businesses to assess VAT based on the country of the purchaser, rather than the VAT of their own country, placing yet another burden on artists in figuring out the application of VAT—even though the regulation was meant, in part, to apply to the likes of e-retailers such as Amazon.com.

In light of the fluctuations in tax rates and their applications, with the ultimate trend inching towards a uniformly high VAT rate, the art market looks nowhere near as enticing in the EU as it does in those countries and locales not subject to the vagaries of the VAT rate debate. In the U.S., for instance, no VAT exists (although, of course, the U.S. does have a sales tax), and there is no import duty assessed on original works of art. Hong Kong does even better—it has no sales tax, import tax, or export tax on artwork. To some degree, the numbers back this up: according to an annual study conducted by Arts Economics for the European Fine Art Foundation, in 2013, the U.S. accounted for 38% of the global market by value, while the EU as a whole dropped 3% points to 32%. (The UK ranked separately at 20%–perhaps not a surprise in light of its 5% reduced VAT rate on artwork, the Flavin case notwithstanding.) Moreover, in the EU itself, the numbers for those member states with the highest VATs declined or remained the same. And while Hong Kong and Singapore did not rank individually as the top winners in 2013 (having perhaps to do with factors other than VAT or customs duties), still, such figures may show in part the effect of applicable tax regimes.

Then there are the so-called “free ports,” located around the globe, which have become popular as a way to store works of art intended primarily as an investment. A free port is essentially a tax haven: artwork may be shipped directly to the free port, and as long it is stored there, VAT will not be assessed on the import. (Of course, once the work is shipped outside the free port to its new destination, any applicable tax will be assessed.) An additional benefit for potential purchasers (depending on the local laws applicable to the free port) is that VAT may not be assessed on any sales of artwork made within the free port—at least not until the artwork has left the free port. (So, hypothetically speaking, if a sale has been made, but the work never leaves the free port, VAT will never be assessed.) Arguably, the art fair Art Basel became popular just for that reason, having made its initial home base in a Swiss free port. As of right now, there are free ports located in Switzerland, Luxembourg, Singapore, and Beijing. (One of the best indications of how popular the Singapore free port has become is that Christie’s auction house now has an office located there.)

The EU Commission has previously expressed that VAT rates are not to be used to control social and economic policy in the EU, and clearly is increasingly attempting to pressure member states, whether through regulation, litigation, or other alternative avenues, to raise VAT rates to a uniformly high rate. However, in the face of global competition, one can only wonder what this trend may mean for the EU in the future as a major player in the commercial art markets.

 

Sources:

About the Author: Elizabeth R. Lash, Esq., serves as in-house counsel at Kroll, where she focuses on reviewing agreements relating to cyber security and data breach notification.

DISCLAIMER: This article was prepared by Ms. Lash in her personal capacity; the opinions are the author’s own, and do not reflect the view of Kroll Associates, Inc. or of its affiliates.

The Race for a Tax Break: How Buyers Circumvent ‘Use Taxes’ on Art

By Emma Kleiner

Francis Bacon, "Three Studies of Lucian Freud," (1969). © The Estate of Francis Bacon.

Francis Bacon, “Three Studies of Lucian Freud,” (1969). © The Estate of Francis Bacon.

When Three Studies of Lucian Freud (1969) by Francis Bacon sold last November in New York for $142.4 million, the art world wondered about the identity of the unnamed buyer and the location of the triptych’s new home. Subsequently, the identity of the triptych’s anonymous buyer was revealed: the buyer was Elaine Wynn, who divorced Las Vegas casino owner Stephen A. Wynn in 2010. Although Ms. Wynn is a resident of Nevada, in December 2013, Three Studies of Lucian Freud made its surprising post-auction debut at the Portland Art Museum in Oregon. While the decision to anonymously lend the painting to the Museum may appear surprising at first, the Portland Art Museum regularly attracts recently auctioned items to display in its galleries. The decision for collectors to regularly lend to the Portland Art Museum originates from a reason more basic than the Museum’s location, collection, or galleries – it is based on a tax break.

Although Ms. Wynn has not released the tax plan for Three Studies of Lucian Freud, her tactical decision to show the triptych in Oregon instead of shipping it to her Las Vegas home from Christie’s in New York likely helped her to avoid use taxes in her home state, which, in her case, may have reached $11 million. Use taxes incur when an individual sends home an out-of-state purchase. By shipping recently purchased artwork out of state immediately, the collector avoids the state’s sales tax, but use taxes are in place to make up for that loss. Still, a collector can avoid their home state’s use tax by utilizing a little known loophole. Usually, artwork is subject to a use tax in the state where it arrives after it is shipped from its purchase location, but five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have a use tax. In contrast, California, which established a use tax in 1935, has a use tax rate of 8.75% and Nevada, which established a use tax in 1955, has a use tax rate of 6.85%.  By the time the artwork arrives in the owner’s home state, it has already been “used” in another state, and thus no use taxes are owed. This clever tactic allows art buyers, who sometimes pay tens of millions for artwork, to relocate the artwork to their private residence tax-free.

Similar to the Portland Art Museum, museums in tax-free use states often encourage collectors to loan recently purchased artwork before it disappears into private homes. For example, the Jordan Schnitzer Museum of Art at the University of Oregon in Eugene, Oregon, has experienced such an influx of recently auctioned artwork that they established a program called Masterworks on Loan, which “invites private collectors to share their masterworks with our constituents.” With a nod to the favorable tax breaks provided by Oregon, the Museum’s website proclaims, “Some lenders may receive tax benefits for participating in our Masterworks on Loan program and should consult a tax advisor to learn more.”

Francis Bacon, THREE STUDIES FOR A PORTRAIT OF JOHN EDWARDS (1984)

Francis Bacon, “Three Studies for a Portrait of John Edwards” (1984)

While the decision for an art buyer to exhibit their purchase at a small museum in a tax-free use state may at first seem like an innocuous opportunity for the expansion of arts education, there is a tension between that idea and the harm to the buyer’s home state that usually receives the revenues from use taxes. Upcoming auctions will provide the art world with the opportunity to see if this tax loophole becomes more prevalent. If it does become popular, individual states may be motivated to change their tax code to make up for the loss that is incurred when art is first displayed in a tax-free use state. Later this month, Christie’s in London will auction another triptych by Francis Bacon, entitled Three Studies for a Portrait of John Edwards (1984), estimated sales value between $4.4 and 5.8 million If purchased by an American collector, it is easy to imagine that this work, too, may head to an exhibit in Oregon shortly thereafter.

Sources:

About the Author: Emma Kleiner is a student at Stanford Law School.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Even in the Opaque Art World, Taxes are Certain: Glafira Rosales/Gonzalez Indicted for Income Tax Evasion

Knoedler Gallery was a reputable art gallery, in existence for over 150 years. When it closed in 2011, accusations that it sold forgeries were just starting to mount. Art collectors are still steaming over purchases of suspect artworks. In fact, another case, according to the New York Times Reporter Patricia Cohen this one is No.6, has been filed earlier this month by the former ambassador to Romania, Nicholas F. Taubman who bought a fake Clyfford Still from the now defunct gallery in 2005. Like dozens of other suspect works, this Clyfford Still came to Knoedler from the stock of the Long Island art dealer Glafira Rosales, a.k.a. Glafira Gonzales (“Rosales”).

Naturalized citizen of the United States, Rosales sold dozens of art works attributed to important 20th century artists, including Mark Rothko, Robert Motherwell, and Jackson Pollock on behalf of fictitious clients. As a part of her elaborate scheme, Rosales lead the Knoedler staff to believe that all of the works she offered were owned and consigned to her by others. Between 2006 and 2008, the proceeds of Rosales’ sales exceeded $14 million. Now, the charges brought against her allege that she was “dealing in fake artworks for fake clients;” however, this is not the thrust of the accusations. In a complaint dated May 20, 2013, Rosales is accused of evading taxes owed on the proceeds from the sale of these fake works. It is an Al Capone story all over again, minus the murder and prostitution.

For years, Rosales omitted or significantly understated her gross receipts; she also failed to comply with mandatory IRS filing requirements. Specifically, Rosales under-reported her income, by omitting at least $12.5 million from her returns between 2006 and 2008. Also, between 2007 and 2011, she failed to report to the IRS the existence and worth of her foreign bank accounts, a mandatory requirement for U.S. taxpayers with foreign holdings in excess of $10,000 during any given year. The IRS investigators were able to trace money transfers to accounts connected to Rosales located in La Coruna and Lugo, Spain.

The eight counts of violations brought against Rosales, if combined (three false tax returns and five years of willful failure to file disclosures), carry a maximum penalty of 34 years in prison and a maximum fine of $1,550,000.

If Glafira Rosales qualifies as the Trojan Horse of the Knoedler Gallery, the Achilles hill of that horse may be her income tax forms.

Source: Sealed Complaint; The New York Times.

Censorship and Taxes: The Latest Developments in Ai Weiwei’s Legal Battles with the Chinese Authorities

China’s most infamous dissident artist, Ai Weiwei, claims that he was barred from attending his court hearing yesterday, June 21, in his lawsuit against a governmental tax agency due to police warnings and intimidation. Chinese courts, which are controlled by the ruling communist party, rarely accept lawsuits filed by dissidents or their relatives. However, last month, Beijing’s Chaoyang district court agreed to hear the artist’s claim that his company, Fake Cultural Development Ltd, was illegally fined 15 million yuan–or $2.38 million–in back taxes last year.

However, the court’s decision appears to have been been accompanied by efforts to keep the artist from actually attending trial. Ai’s legal consultant, Liu Xiaoyuan, has been missing since he was told to meet state security officers last Tuesday. The artist also told CNN that the police started calling him repeatedly, warning him not to come to court. He also said that an unprecedented thirty police cars were parked outside his house yesterday. 


Infamous for his widespread use of Twitter to communicate with the public, Ai remained true to form. He continually tweeted updates on the police barricade outside his studio and sarcastically thanked the Chinese authorities for protecting the artist’s Caochangdi studio and “preventing unknown forces from interfering with judicial order.” He also tweeted a picture of himself in a police uniform.

This lawsuit is the most recent development in a series of run-ins with the Chinese authorities. In April of 2011, he was detained for 81 days without charge and ordered to pay 15 million yuan in back taxes, which officials said he owed through his company. Ai and his supporters have said that these allegations are a cover for accusations that he is trying to overthrow the state. The artist was held mainly in solitary confinement until he was released in June. 


However, governmental efforts to silence Ai have consistently failed, as overwhelming public support and donations were sent to the artist in response to the tax penalty. Roughly 30,000 people donated money to help Ai cover the bond required to contest the tax charges.He paid 8.45 million yuan late last year in order to contest the charges. The artist also stated that his wife would have been jailed if he had not paid the sum at that time.

In response, a Chinese foreign ministry spokesman declined to comment directly on Ai’s allegations. Hong Lei told international journalists on Wednesday that “China is a country of laws… China’s constitution and laws protect citizens’ legal rights.” Ai said that the police actions are contradictory and “really harming the legal process.”

Ultimately, the artist chose not to attend trial, but did send his wife, Lu Qing, to court in his place. Supporters, critics, and the international community await developments in the struggles between the artist and the authorities as they unfold.

Sources: China Dissident Ai Weiwei Harassed by Police, He Says, Ai Weiwei’s Lawyer Missing as Artist is Warned Away from Tax Hearing