In 2011, the notorious forger Wolfgang Beltracchi was sentenced to six years in prison for creating and selling “unknown” works, supposedly by various master artists, to unsuspecting art dealers.
One of these dealers was New York based Richard Feigen. The New York Law Journal (NYLJ) reports that in 2004 Feigen sold a painting which he believed was by the Surrealist painter Max Ernst for US$2.5 million. Having sold the piece, the dealer then duly paid sales tax of US$215,625 to the tax authorities.
|One of Beltracchi's fake Max Ernst paintings|
When the Beltracchi scandal broke and Feigen found that the Ernst was a skilful fake, he bought the painting back from its new owner at the same price for which he had sold it. In turn, the French gallery from which Feigen had bought the painting gave the dealer back the same sum he himself had paid.
However, this still left Feigen short of the US$215,625 sales tax that he had paid in respect of the aborted sale of the Ernst. So in June 2011, following Beltracchi’s trial, Feigen applied for a credit against, or refund of, that sum.
Unfortunately for the dealer, such refunds are permitted only within a three year window and that window had expired, at the latest, in early 2008. “Public policy does not favour the granting of refunds beyond the allowed period of time,” the tax authorities stated. “Anything less than this degree of certainty would make the financial operation of government difficult, if not impossible.”
It is entirely understandable that such limits should be applied in the majority of cases. But in a case where the taxpayer himself was subject to fraud and took prompt steps to correct his tax position once that fraud became apparent, the result appears harsh.
“I can’t imagine that New York would want to collect a sales tax on a sale that was cancelled,” the NYLJ reports Feigen saying. “I can’t imagine how they can justify collecting tax on a non-sale.”
Given the scale of the art market in New York, this ruling could raise the suggestion that when buying art work the seller be contractually placed on risk for any resulting sales tax as well as for the value of the work itself, in the event that the work is not what it seems.
Read more here.