Blockage discount
Encyclopedia
Blockage discount is an art-business-related and legal term of art for referring to the money discount
assigned to a group of artworks by a single artist when that group of works is to be released to market as a group rather than individually. A blockage discount adjusts the fair market value
of the works downward because of the risks of depreciation
when a large volume of art is released into the market all at once.
A blockage discount adjusting fair market value also affects the tax consequences of a sale in the U.S., and is frequently a subject of litigation when an artist dies while holding a large collection of her or his own work. For instance, when Georgia O'Keeffe
died she had over 400 of her own works in her estate, and when Andy Warhol
died he had over 90,000 works, including 4,100 paintings, 9,000 drawings, 19,000 prints and 63,000 photographs. In Georgia O'Keeffe's case, her estate's appraisers established blockage discounts based on solid evidence of market sales, but the IRS used its own valuation and the Tax Court
assessed a resulting tax of more than the valuation of the collected works at her death. In Andy Warhol's case Surrogate Court of New York rejected the proposed discounts of Christe's, which averaged 60%. Instead, the court applied an average discount of 25%. The court failed to articulate the specific rationale for it's determination, but did state that Warhol was more famous than Smith & O'Keeffe. The court's application of an average discount of 25% has been criticized by attorneys and appraisers because , inter alia, it ignored the necessary time it would take to sell 90,000 pieces of art. Therefore, accountants and estate planners for artists plan with such eventualities in mind.
The IRS has stated that carrying costs
and opportunity costs are relevant factors for consideration in blockage discounts, along with time to market
.
Discounts and allowances
Discounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...
assigned to a group of artworks by a single artist when that group of works is to be released to market as a group rather than individually. A blockage discount adjusts the fair market value
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
of the works downward because of the risks of depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
when a large volume of art is released into the market all at once.
A blockage discount adjusting fair market value also affects the tax consequences of a sale in the U.S., and is frequently a subject of litigation when an artist dies while holding a large collection of her or his own work. For instance, when Georgia O'Keeffe
Georgia O'Keeffe
Georgia Totto O'Keeffe was an American artist.Born near Sun Prairie, Wisconsin, O'Keeffe first came to the attention of the New York art community in 1916, several decades before women had gained access to art training in America’s colleges and universities, and before any of its women artists...
died she had over 400 of her own works in her estate, and when Andy Warhol
Andy Warhol
Andrew Warhola , known as Andy Warhol, was an American painter, printmaker, and filmmaker who was a leading figure in the visual art movement known as pop art...
died he had over 90,000 works, including 4,100 paintings, 9,000 drawings, 19,000 prints and 63,000 photographs. In Georgia O'Keeffe's case, her estate's appraisers established blockage discounts based on solid evidence of market sales, but the IRS used its own valuation and the Tax Court
United States Tax Court
The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
assessed a resulting tax of more than the valuation of the collected works at her death. In Andy Warhol's case Surrogate Court of New York rejected the proposed discounts of Christe's, which averaged 60%. Instead, the court applied an average discount of 25%. The court failed to articulate the specific rationale for it's determination, but did state that Warhol was more famous than Smith & O'Keeffe. The court's application of an average discount of 25% has been criticized by attorneys and appraisers because , inter alia, it ignored the necessary time it would take to sell 90,000 pieces of art. Therefore, accountants and estate planners for artists plan with such eventualities in mind.
The IRS has stated that carrying costs
Carrying cost
In marketing, carrying cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishibility, shrinkage and insurance....
and opportunity costs are relevant factors for consideration in blockage discounts, along with time to market
Time to market
In commerce, time to market is the length of time it takes from a product being conceived until its being available for sale. TTM is important in industries where products are outmoded quickly...
.
See also
- Art financeArt financeArt finance and Art finance advisory are terms referring to a set of financial services provided by some auction houses, banks, and consulting firms, and marketed to such firms' clients who are art collectors or artists.-Generally:...
- Art market
- Art valuationArt valuationArt valuation, an art-specific subset of financial valuation, is the process of estimating the potential market value of works of art and as such is more of a financial rather than an aesthetic concern, however, subjective views of cultural value play a part as well...
- Art world economics
- Art workWork of artA work of art, artwork, art piece, or art object is an aesthetic item or artistic creation.The term "a work of art" can apply to:*an example of fine art, such as a painting or sculpture*a fine work of architecture or landscape design...
- Estate planningEstate planningEstate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses...
- Tax lawTax lawTax law is the codified system of laws that describes government levies on economic transactions, commonly called taxes.-Major issues:Primary taxation issues facing the governments world over include;* taxes on income and wealth...