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Exec Indicted On Tax Evasion Charge Earned Millions From Stock, Salary, Bonuses

Jun 4, 2002 | Newsday

In the past five years, Dennis Kozlowski had received nearly $22 million in salary and bonuses as chief executive of Tyco International. He controlled millions of shares of company stock worth almost $50 million, and that wasn't even his entire fortune.

Yet yesterday, he was arraigned in Manhattan, accused of avoiding paying about $1 million in sales tax on $13 million worth of artwork, one day after resigning as chief executive of Tyco International Ltd. Once the aggressive head of one of the country's largest conglomerates, Kozlowski now faces possible jail time.

While sales tax evasion cases commonly involve expensive cars, jewelry or boats, experts say this case stands out for its high-toned objects, expensive paintings by some of the masters.

Attorney Steven U. Teitelbaum, the co-chairman of the sales and use tax committee for the New York State Bar Association and the deputy commissioner and counsel of the state Department of Taxation and Finance from 1995-99, said tax evasion cases involving artwork almost always involve some sort of tipoff.

In this case, the Manhattan district attorney, which is prosecuting the case, said the tip came from the state Banking Department, which flags transactions above $10,000. Teitelbaum said someone in the department likely noticed a particular transaction, say, the nearly $2 million Kozlowski is supposed to have paid for three paintings to London dealers and alerted the proper authorities.

Manhattan District Attorney Robert Morgenthau has handled such cases before, most notably in the mid-1980s when several Fifth Avenue jewelers paid millions of dollars in fines for sales tax evasion after disguising purchases by mailing empty boxes to out-of-state addresses when actual items were delivered to New York. This led to stricter controls on invoices and shipping, art dealers said.

The more typical cases of sales tax evasion involve New York residents who buy expensive cars, boats or jewelry and register them in another state to avoid New York sales taxes. The general rule in New York is that in such a case you need to pay the "use” tax on an item if New York is your primary residence.

The reason such cases are curious, Teitelbaum said, is that most of the time, the accused evader could have afforded the taxes, but for whatever reason, arrogance, stupidity, the person chose to avoid them.

Although Kozlowski's net worth is difficult to pin down, he was a multimillionaire. Kozlowski and two partnerships he controls own about 3 million shares of Tyco stock outright, according to a filing in early February, said Lon Gerber, director of research at the research firm Thomson Financial. At current prices, that stock is worth about $49.2 million. In the last five years, Tyco has paid Kozlowski nearly $22 million in salary and bonuses and has made millions more through stock compensation. According to public filings, Kozlowski has exercised more than $281 million in stock options, much of which he transferred to partnerships he controls.

On top of his other stock holdings, Tyco has awarded Kozlowski $97 million in restricted stock since 1997, although the value of those awards are likely much lower since the company reported the value of the grant based on what the stock was trading at on the day of the grant. Some of that stock may also be forfeited now that Kozlowski has resigned from the company. He's also been given options to purchase millions of shares of Tyco stock, but those options aren't worth anything right now given Tyco's depressed share price.

Kozlowski will also likely receive some severance but company officials said that his former employment agreement that would've paid out three times his salary and highest bonus became void after he resigned. "The board has committed to enter into good faith discussions on a severance arrangement,” Tyco spokesman J. Brad McGee said.

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