*sigh*
A badly (badly!) misinformed rumor.
In 1972, Lou Reed released the album
Transformer -- this is the classic album that included "Walk On The Wild Side" and "Satellite Of Love"; and charted for 31 weeks in 1972-73.
The album's title was a play on words, as the 'transformer' not only referred to an electrical transformers, but also to the guy who transforms into a drag queen at night. In keeping with this theme, the front cover featured a white overexposed "electrified" picture of Reed, while the back cover featured a scene showing a stereotyped gay hustler (looking straight out of a Village People video) staring down a drag queen, and displaying a cartoonishly large erection.
The erection was deliberately oversized because the scene was a caricature. Anyone who mistook that picture for Reed's real erection didn't understand the album well enough to appreciate the parody.
The back cover photograph that started this stupid rumor can be seen here. (On the original vinyl album, the drag queen appeared in a window; the picture was altered for some CD releases.)