Tax Authority didn’t do its homework on residency Amateur sleuths traced stolen Cortés papers to US auctions
The Israel Tax Authority (ITA) has just received a dressing down from the district court in a case about residency for Israeli tax purposes (Zeev Lederman vs Tel-Aviv 5 Assessing Officer, 41182-01-19 of March 24, 2021).
This was a capital gains tax case that hinged on the residency of the taxpayer.
Background
The taxpayer was born in the US in 1961 and immigrated to Israel in 1973 with his family. In 1990, he left Israel to study in the US but stayed on to work in various US hi-tech firms. He married an Israeli girl he met in the US in 1993 and they lived in San Francisco. In 1999, she decided to live in Israel, where they eventually had children, but he decided to continue living and working intensively in the US. They were largely estranged but he returned to Israel for Jewish festivals, birthdays and occasional business reasons.
In 2006, he was recruited to lead Wix, an Israeli hi-tech firm, and bought shares in Wix. In 2011 and 2014, he sold the shares at a gain of around NIS 10.5 million.
The issue
The taxpayer claimed he resumed Israeli residency as a “senior returning resident” in 2009. As he acquired the Wix shares in 2006, he invoked a clause in the Israeli tax law (ITO Sec. 97(b)(3)) exempting him from Israeli capital gains tax thereon. The ITA said no such exemption applied claiming he resumed Israeli residency in 2002.
Who an Israeli resident?
In general, an individual becomes resident for Israeli tax purposes if their center of living is in Israel, having regard to their overall circumstances – family, economic and social links, including: permanent home, home of that person and of their family, regular or fixed place of activity, place of active and substantial economic interests, place of activity in organizations, associations and institutions. There is a rebuttable presumption of residency if the individual spends at least 183 days in Israel in any tax year (calendar year) or 425 days over three years with at least 30 of those days in the latest year.
In this case, the taxpayer exceeded the 183/425 day thresholds in 2002, 2006 and 2009. On average, the taxpayer made 12 trips to Israel per year lasting an average of 12 days each.
But the center of living is what matters.
Insufficient homework
The ITA classified the taxpayer as Israeli resident because of two indicators of an Israeli center of living: the number of days in Israel each year and the fact that the wife and children lived in Israel
However, the court said critically, “When reviewing ‘overall circumstances’ you can’t just find an indicator, stop and say here is an indicator so I don’t need to continue reviewing the other indicators .... that does not seem to be the correct approach.”
In particular, the court found it “notable” that the ITA was unaware of all the taxpayer’s assets and had not looked deeply enough to attach any importance to his US activities and assets, even though the taxpayer had filed much documentation when responding to an ITA residency questionnaire (Paras. 57 & 58).
Main facts
The taxpayer’s wife testified that she alone raised the children. “He wasn’t there, he just wasn’t.” She also waived joint ownership of the San Francisco property. The taxpayer’s permanent homes were in San Francisco and Texas. He had another permanent home available to him in Tel Aviv, but it wasn’t really a home because he had no clothing or other personal possessions there. He lived out of a suitcase. His business activities, property and securities were mainly in the US. He used US credit cards outside Israel. He had Israeli and US cellphones and driver’s licenses. The court noted he was born in the US, moved to Israel in his teens and moved back at age 30. As a US citizen, he filed US tax returns and would be paying US tax on the capital gains in question.
Turning point
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com
MEXICO CITY (Reuters) – In September, a New York auction house had a rare treasure up for sale: a five-centuries-old letter revealing political intrigue involving Hernán Cortés, the famed leader of the Spanish force that colonized what is modern-day Mexico.
Cortés papers seldom come to market. The 1521 document, offered by Swann Galleries, was expected to fetch $20,000 to $30,000. That is, until a plucky group of academics in Mexico and Spain helped thwart the sale.
Searching online catalogs of global auction houses and mining one of the researchers’ personal trove of photos of Spanish colonial documents, they traced its provenance to the National Archive of Mexico (AGN), the nation’s equivalent of the National Archives in Washington. An image of that 1521 letter captured by a Mormon genealogy project would play a supporting role.
What’s more, these amateur detectives unearthed nine additional Cortéslinked papers put on the block from 2017 to 2020 in New York and Los Angeles by auction houses – including the well-known British firms Bonhams and Christie’s – that are now confirmed to be missing from AGN, officials at the Mexico City-based archive told Reuters. They said some of those documents, once bound in weather-beaten books, had been surgically removed as if with a scalpel.
“It’s scandalous,” said one of the gumshoes, María Isabel Grañén Porrúa, a prominent Mexican cultural figure and a scholar of 16th-century Spanish colonial books. “We are very worried, not just by this theft, but also about all the other robberies and looting of national heritage.”
Names of the buyers and sellers of the Cortés documents were never disclosed publicly by the auction houses. Such anonymity is commonplace in an industry whose well-heeled patrons prize secrecy.
Swann Galleries, which handled a half-dozen Cortés papers, denied wrongdoing. London-based Christie’s, which put two out for bid, said it carefully vets the provenance of all items it puts up for auction. Bonhams, another London firm, auctioned one; it declined to comment. Los Angeles auction house Nate D. Sanders, which put one Cortés document on the block, did not
respond to a request for comment.
The Cortés flap comes at a time of intensifying scrutiny of the global antiquities trade. Countries including Mexico are watching auction houses for potentially pilfered objects. Others are demanding repatriation of relics displayed in foreign museums.
The researchers’ sleuthing has sparked law enforcement investigations in Mexico as well as in the United States by US Homeland Security Investigations (HSI), Reuters reporting has revealed.
A spokesperson for declined to comment.
The news organization is also the first to reveal that Mexico’s Foreign Ministry has enlisted the help of the US Department of Justice (DOJ) in repatriating the 10 missing manuscripts, according to Alejandro Celorio, the ministry’s legal advisor.
“We are already in cooperation with the federal prosecutor in the New York district,” Celorio said.
The DOJ declined to comment.
Separately, Reuters tracked down the Brazilian buyer of one of the allegedly purloined Cortés manuscripts handled by Swann Galleries who said he returned it to the auction house.
Manhattan-based Swan Galleries has emerged as a key player in the unfolding drama. It canceled its scheduled September 24 auction of the 1521 Cortés letter on September 9, one day after Reuters contacted the firm about the researchers’ allegations.
Swann Galleries said it works diligently to ascertain the provenance of antiquities it auctions. It keeps extensive records and cooperates fully with law enforcement, said Alexandra Nelson, Swann Galleries’ chief marketing officer. “Knowingly moving stolen material through an auction house is just about
HSI
the silliest thing a person can do,” Nelson said.
Robert Wittman, a former special agent who founded the Art Crime Team at the US Federal Bureau of Investigation (FBI), said big auction houses aren’t doing enough to safeguard the world’s antiquities.
“They are not in the business of recovering stolen property or protecting cultural property,” Wittman said. “They’re in the business of buying and selling.”
Also under scrutiny is the AGN, Latin America’s largest archive. Mexican academics have long warned that the holdings of the cashstrapped institution are vulnerable to decay and theft.
“We are not ruling out any hypothesis,” about how the Cortés papers were stolen, Marco Palafox, legal counsel for the AGN, told Reuters. “We are not discounting the possibility that the person responsible for the thefts of these documents was a manager, a worker or a researcher.”
THE AMATEUR SLEUTHS
Key to the discovery of the alleged Cortés heists was a small group of Mexico-based academics. They included Grañén, the researcher of Spanish colonial books, and Michel Oudijk, a Dutch philologist at Mexico’s National Autonomous University of Mexico. They also recruited María del Carmen Martínez, a renowned Cortés scholar at the University of Valladolid in Spain.
They said their suspicions were first aroused when a handful of Cortés-signed letters suddenly appeared at auctions in 2017 after three decades of no public sales.
The mini-boom began in April that year at Swann Galleries, which touted a 1538 letter from Cortés to his property manager as the first such document sold publicly since 1984. “Cortés letters
are quite scarce on the market,” the auction house said on its website.
The document fetched $32,500, according to the website. The name of the buyer was not published. But in 2018, the letter was displayed at The Morgan Library & Museum in New York. The institution said it did not own the letter and that it was part of an exhibition based on the private manuscript collection of Brazilian art historian Pedro Corrêa do Lago.
Reuters contacted Corrêa do Lago last month to inquire about the document.
“I have returned the letter, acquired in good faith, to Swann Galleries,” Corrêa do Lago said in an e-mail. He declined further comment on what he termed a “very rare and unfortunate occurrence.”
Swann Galleries declined to comment on Corrêa do Lago’s remarks.
Bonhams, Christie’s and Nate D. Sanders also auctioned one Cortés document each in 2017, according to the academics and information on Bonhams and Christie’s websites.
Nate D. Sanders did not respond to requests for comment. Bonhams declined requests for comment.
Christie’s said it devotes “considerable resources to investigating the provenance and authenticity” of auctioned objects and it “does not comment concerning ongoing investigations.”
The researchers said they alerted Mexican antiquities authorities in 2018 and 2019 about their suspicions as fresh Cortés manuscripts kept appearing at auctions, including four in 2019. When two more surfaced in 2020, with still no action from the government, the academics launched their own investigation around mid-year.
MORMON CONNECTION
One of the groups contacted
Martínez, the Spanish scholar, for help. Not only was Martínez a leading Cortés expert, she had taken thousands of photographs of AGN manuscripts documenting his colonial administration during two trips to Mexico City in 2010 and 2014.
The academics quickly compiled a list of nine documents that had been put up for auction since 2017. A tenth was to be sold by Swann Galleries on September 24, 2020: a 1521 missive to Cortés from some allies imploring him to avoid an emissary of the Spanish crown intent on stripping him of his powers.
It sounded familiar to Martínez. Gazing over her photos, she found a match. The document shown on Swann Galleries’ website was identical to one she had photographed at AGN years earlier – down to the penman’s swooping cursive and a small triangle-shaped chunk of parchment missing from the left-hand margin.
In all, Martínez had photographed eight of the 10 manuscripts allegedly swiped from Mexico’s national archive.
“We really shouldn’t have situations like this in the 21st century,” Martínez told Reuters.
The researchers went public with their concerns in early September. Swann Galleries canceled its September 24 sale following inquiries from Reuters.
Palafox, the archive’s legal counsel, said AGN didn’t contact the US auction house to stop the sale because it could not quickly establish – beyond Martínez’s photos – that the 1521 manuscript and others were, in fact, missing from its collection.
AGN houses hundreds of thousands of documents, but only about 40% have been cataloged, Palafox said. “The other 60% we don’t know what’s there,” he said.