[Seasmillets]

How the Rich get Richer (usually, anyway) ...

Major Error Is Reported in Tax Paid by Mrs. Astor
on Sale of Painting

NY TIMES
By SERGE F. KOVALESKI
September 24, 2006
Legal papers filed by J. P. Morgan Chase, the temporary guardian of Brooke Astor’s assets, state that her son recently told the bank that he now realizes he made an error in his mother’s 2002 tax return by overstating the original price of a Childe Hassam painting she had sold, resulting in a large underpayment of taxes three years ago.
As it turns out, the discrepancy was a matter not just of thousands of dollars, but of millions.
The so-called cost basis for the work of art, “Flags, Fifth Avenue,” was listed in Mrs. Astor’s federal income tax filing as $7.425 million, a copy of the document shows. But she paid $172,010 for the painting when she bought it in March 1970, according to the bill of sale.
Because of the inflated figure, Mrs. Astor apparently ended up paying far less in taxes than required on the capital gains she realized from the February 2002 sale of the painting by Hassam, a renowned American Impressionist. Mrs. Astor’s son, Anthony D. Marshall, 82, who managed her finances at the time, sold the painting to an art gallery for $10 million and collected a $2 million fee from his mother for handling the transaction.
“Up the Avenue From Thirty-Fourth Street, May 1917" aka “Flags, Fifth Avenue” by Childe Hassam

The tax issue concerning the painting, also known as “Up the Avenue From Thirty-Fourth Street, May 1917,” has arisen as a compelling side issue from the review of mounds of financial documents in the legal battle over the care and fortune of Mrs. Astor, the 104-year-old philanthropist and socialite.

In July, Mr. Marshall’s son, Philip Marshall, filed a court petition claiming that his father had been grossly neglecting Mrs. Astor’s well-being while enriching himself with her wealth.
Philip Marshall has asked the court to appoint permanent guardians for his grandmother; the bank is temporarily in control of her assets.
The case against Anthony Marshall has hinged on a string of changes to Mrs. Astor’s will that took place in late 2003 and early 2004, after she had experienced a marked decline in her health. The changes redirect millions of dollars to her son upon her death.
Mr. Marshall has vigorously denied accusations that he neglected his mother, insisting that he has been an honest and loving steward of her personal affairs for more than 25 years. His lawyers have cast him as an astute and attentive financial manager for Mrs. Astor, and they contend that her investments have flourished as a result of his keen involvement.
One of Anthony Marshall’s lawyers has asked J. P. Morgan Chase to file amended tax returns on behalf of Mrs. Astor that reflect the true capital gains stemming from the sale of the painting.
J. P. Morgan Chase says it is reviewing the documents as part of its fiduciary responsibilities. But in a court filing, the bank describes the request as “ironic,” noting that Mr. Marshall has also objected to its efforts to learn more about the deal.
“The ‘error’ evidently relates to a substantial overstatement of the cost basis of the Hassam painting (and a resultant significant underpayment of the tax),” Les Fagen, a lawyer for J. P. Morgan Chase, wrote. He added, “This is the same painting transaction which he contends in his opposition papers is not now worthy of further inquiry, as the bank has requested.”
Sanford J. Schlesinger, a tax lawyer and founding partner at Schlesinger Gannon & Lazetera in New York, who is not involved in the case, said that the $2 million commission would be deducted from the total gain on the sale of the painting, bringing the figure to just over $7.8 million, which was subject to a 28 percent federal tax rate in 2002, as well as additional state and city taxes. Mrs. Astor could also face sizable penalties and interest for underpaying the tax, he said.
As her return stands now, she would have been taxed only on capital gains of $2.575 million relating to the work of art.
“It looks like it is $5 million in unreported income. That’s a considerable difference in gain that was not taxed,” Mr. Schlesinger said. He noted that it was difficult to determine precisely what Mrs. Astor would owe because of variables like the alternative minimum tax and offsetting capital losses that could affect such calculations.
Mr. Marshall’s lawyers provided few details about how the capital gains from the sale of the Hassam painting came to be substantially under-reported in Mrs. Astor’s 2002 tax return. One of his lawyers, Kenneth E. Warner, would only briefly address the matter via e-mail.
Mr. Warner said that Mr. Marshall “does not know how the mistake got made.” Mr. Warner said that as part of the court case concerning Mrs. Astor, Mr. Marshall saw the document for the first time since it had been submitted to the Internal Revenue Service in 2003.
As soon as Mr. Marshall noticed it, “he immediately gave us instructions to notify Chase so that it could be corrected without delay.”
Mr. Warner would not say whether Mr. Marshall, who was granted power of attorney by his mother in November 1978 and held that authority in 2003, had signed the tax return.
Mr. Fagen, the lawyer for J. P. Morgan Chase, would say only that the bank was reviewing Mrs. Astor’s financial records and that “one goal is to assure that she is in compliance with her legal obligations.”
Alan M. Pollack, a lawyer for the Long Island accounting firm that prepared the return, Samuel Cohen & Company, which he noted had done work for Mrs. Astor for about 25 years, said the firm had not committed any errors when it filled out the schedule concerning the sale of the painting.
“Samuel Cohen & Company fulfilled its professional obligations to its client, did not make unilateral decisions about Mrs. Astor’s taxes and was provided the information about the painting by one of Mrs. Astor’s representatives,” Mr. Pollack said.
He added that he did not feel it was appropriate to identify that person because of the continuing court proceedings in the Astor case.
Robert Marvin, a spokesman for the I.R.S., said federal law prevented him from answering any specific questions about Mrs. Astor’s tax return. But asked about how the agency decides to pursue a case for prosecution, he said that as a general rule, a referral is made to the Department of Justice when the I.R.S. has evidence that an omission from a tax return was “willful.”
“A financial analysis or investigation often determines whether the omission is unintended or a willful attempt to evade payment of taxes,” Mr. Marvin said.
In court papers filed last week by Mr. Marshall’s lawyers, new details were provided about the sale of Mrs. Astor’s Hassam piece to the Gerald Peters Gallery. Mr. Marshall said that in the fall of 2001, he and his mother had the painting shown at the Adelson Galleries Inc. on the Upper East Side. During that time, Mr. Marshall and his mother talked about selling the painting if it generated any interest, according to the filing.
“Not long after the Adelson exhibition ended, a potential buyer approached me about purchasing the painting,” Mr. Marshall said in the filing. “When I told my mother how much was being offered, she decided to sell it, and to share some of the profit with me by paying me a ‘commission’ for arranging the purchase.”
Those who know Mrs. Astor have questioned whether she would have wanted to sell the Hassam painting.
Although her 1993 will stipulated that the work of art was to be sold after her death, two of her wills after that, in 1997 and 2001, stated that the painting was to be bequeathed to the Metropolitan Museum of Art, provided the museum displayed the piece as part of its permanent collection. Otherwise, the painting was to go to a New York City institution that would agree to permanently display it.
Mrs. Astor’s most recent will, dated Jan. 30, 2002, shortly before Mr. Marshall sold the painting, does not mention it by name.
But one of Mr. Marshall’s lawyers said the 2002 will says that any works of art that are not specifically bequeathed are to be sold.
Mike McIntire contributed reporting.
Copyright 2006 The New York Times Company