Blockage discount is an art-business-related and legal

term of art Jargon is the specialized terminology associated with a particular field or area of activity. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a particu ...

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 The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...

of the works downward because of the risks of

depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...

when a large volume of art is released into the market all at once.In re Warhol, No. 824/87, 1994 WL 245246 * 1 (Surr. Ct., N.Y. Co. 1994).Grosz v. Serge Sabarsky, Inc.
24 A.D.3d 264, 806 N.Y.S.2d 498, 500 (1st Dep’t 2005).Lerner and Bresler
Art Law: The Guide for Collectors, Investors, Dealers, and Artists
Practising Law Institute, 1998, p.1157 et seq.. (, 3d edition)

Tax issues

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 Totto O'Keeffe (November 15, 1887 – March 6, 1986) was an American modernist artist. She was known for her paintings of enlarged flowers, New York skyscrapers, and New Mexico landscapes. O'Keeffe has been called the "Mother of Amer ...

died she had over 400 of her own works in her estate, and when

Andy Warhol Andy Warhol (; born Andrew Warhola Jr.; August 6, 1928 – February 22, 1987) was an American visual artist, film director, and producer who was a leading figure in the visual art movement known as pop art. His works explore the relationsh ...

died he had over 90,000 works, including 4,100 paintings, 9,000 drawings, 19,000 prints and 63,000 photographs.Inde, Vilis, Art in the Courtroom, Praeger, 1998, p. 158. In Georgia O'Keeffe's case, her estate's appraisers established blockage discounts based on solid evidence of market sales, but the

IRS The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...

used its own valuation and the Tax Court assessed a resulting tax of more than the valuation of the collected works at her death.Establishing a Value is Important!
Planned Giving Design Center, LLC. 2009. In Andy Warhol's case Surrogate Court of New York rejected the proposed discounts of

Christie's Christie's is a British auction house founded in 1766 by James Christie (auctioneer), James Christie. Its main premises are on King Street, St James's in London, at Rockefeller Center in New York City and at Alexandra House in Hong Kong. It is ...

, which averaged 60%. Instead, the court applied an average discount of 25%. The court failed to articulate the specific rationale for its 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.Englebrecht
Valuation of Art Objects for Estate Tax Purposes
The CPA Journal, 09/02/2002. The IRS has stated that

carrying cost In marketing, carrying cost, carrying cost of inventory or holding 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 co ...

s and

opportunity costs In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...

are relevant factors for consideration in blockage discounts, along with

time to market In commerce, time to market (TTM) is the length of time it takes from a product being conceived until its being available for sale. The reason that time to market is so important is since being late erodes the addressable market into which prod ...

.Lerner and Bresler, pp. 1354, 1364.

References

External resources

Wadler
The Heirs of George Grosz Battle His Dealer's Ghost; A Protracted Lawsuit Outlives Its Target, But Not Its Anger
The New York Times, August 27, 2001. Business of visual arts

Tax issues

See also

References

External resources