by Elin Lake Ewald, ASA
Over the last five years, the word BLOCKAGE has perhaps become the most overworked word in the appraisal vocabulary, akin to the art world’s repetitive and mind-numbing intonation of the word APPROPRIATION over the last five years. During the past couple of months there have been queries from both appraisers and attorneys in various parts of the country, asking about blockage application. Most of the queries concerned estate evaluations, but what is even more provocative to me is the concern about the use of discounting in appraisals for charitable contribution.
In the June 1993 ASA conference in Seattle, Richard Raymond Alasko, ASA, in the related seminar handbook (Section 2, point A), defined blockage as “A discount applied to a sum of value where a quantity of very similar properties would impact a market at one date. If such a quantity would have an adverse effect on the market a discount which considers a reasonable estimate of time for the market to absorb the quantity is applied. Blockage is not a set formula.”
In the view of the Internal Revenue Service, a process that is applied to one type of evaluation (fair market value) for a particular purpose (estate taxation) should be applied to an evaluation (fair market value) for another particular purpose (charitable contribution). But there are specific instances in which the IRS will allow a discount in one instance relating to donation matters while disallowing it in other tax matters. In other words, a contribution by one of five owners of a painting gifted to a museum is given full value for his/her share. A situation in which we presented a set of facts before the IRS held that partial interest in a work of art should be discounted under certain circumstances. Although the IRS initially opposed the concept, it was successfully argued in a case that resulted in a 25% reduction to the fair market value of fractional interests in works of art (Personal Property Journal, Winter 1995, pp. 16-20).
Since there is no set formula for determining blockage, and because the IRS will consider a reasonable and carefully considered presentation of facts that may alter the normal process, we would like to consider an approach to the donation of multiple and similar artworks in the same year by a single donor. Reviewing the type of question that has been posed, short hypothetical cases will be laid out. My response is not be to be considered as anything more than my “Viewpoint”;however, I believe that this type of question opens the gates to discussions among appraisers about the various approaches professionals should be looking at to solve specific situations. Although there are rules and regulations to which appraisers may look for guidance, individual appraisal problems may not be directly answerable in books of rules and regulations.
Historically, the concept of blockage originated with business valuation. The first application of the concept of blockage for the evaluation of works of fine art (Estate of David Smith, 57 T.C.M. 650 1972) was based on the sale of a large number of securities. Section 20.2031-2(b) of the Federal Estate Tax Regulations, in respect to large blocks of stock, (e) states:
If the executor can show that the block of stock to be valued is so large in relation to the actual sales on the existing market that it could not be liquidated in a reasonable time without depressing the market, the price at which the block could be sold as such outside the usual market, as through an underwriter, may be a more accurate indication of value than the market quotations. Complete data in support of any allowance claimed due to the size of the block being valued shall be submitted with the return.
According to Value Added, a business valuation publication of Mercer Capital, Memphis Tennessee, (Volume 6, Nos. 2,3, 1994) the standard for considering a potential blockage discount was established in Helvering v. Maytag [125 F. 2d 55 (8th Cir. 1942)]: The taxpayers must affirmatively show that the block is so big in comparison with the amounts of the stock which have been traded on the exchange where it is listed that it could not be sold on quoted market at its quoted prices within a reasonable time by skilled brokers following prudent practices for liquidation. Apparently there have not been generous discount blockages granted in recent decisions, and when they have been given they have proved skimpy [5% inAdair v. Commissioner (54 T.C.M. 705. 1987)]. J. Michael Julius, ASA, CFA, author of the two-part article, “Blockage Discounts and Restricted Stocks,” in Value Added, poses several questions to business valuation appraisers in estimating a blockage discount. We have extrapolated from his list a series of questions that we have transformed into questions for personal property appraisers to use in determining whether or not to apply blockage to the charitable contribution of works ofart:
· What is the size of the block of (type of artwork) relative to the total outstanding works by this artist, and his/her monthly or yearly sales at auction?
· Based on auction sales, how long would it take to sell all the related artworks on the public market?
· What has been the trend of prices of other similar artworks in this school of art?
· What pattern have prices of the subject’s artwork followed? Are any unusual factors influencing the price of the artist’s work?
· How many collectors are there for the artist’s work?
In Estate of Van Horne v. Commissioner [78 T.C, 728 (1982)]
... it must be shown that actual sales on the market, at or near the valuation date are not representative of the value of the stock held because of the disproportion between the volume of market sales and the block of stock to be valued.
Given the points made by Mr. Julius (and reinterpreted by me for purposes of this article), and given the following questions posed, we invite your comments on the correct steps in deciding whether blockage is applicable to the group of artworks being taxed, or donated, or indeed if any blockage is appropriate:
· An inquiry from an East Coast ASA appraiser concerns an estate containing several hundred artworks of varying types, from 19th century prints to a collection of approximately 50 textiles, and including numerous individual sculptures, paintings, and other art media. The attorney for the estate suggested that blockage could be applied because of the sheer quantity of the materials. (We thought that no blockage could be effectively applied since the sale of anyone item, orgroup of items, would not impact on the market value in these particular categories, and that this would be an inappropriate usage of the blockage discount.)
· An inquiry from the Midwest asks about the donation of a collection of 500 prints by the same artist. A second call revealed that the prints being valued were from different periods in the artist’s long life, and that the number of prints within each edition varied. (The question to be answered here is – how prolific was the artist during his lifetime? (The approach to this would be similar to that exercised in Estate of Georgia T. O’Keeffe v. Commissioner [63 T.C.M. 2699] in which the Court determined that a blockage discount of 25% should be applied to half the work and 75% to the remainder, based on the salability and quality of the various pieces remaining in the estate.)
REFLECTIONS ON A WISH BOOK
In law one refers to documented cases in which, for instance Jones v. Smith might prove the legal point that you cannot enter a stranger’s house to use the phone unless he first agrees to let you in - that kind of thing. As ASA appraisers know, there are only a handful of law cases on the books to which to refer that involve the appraisal profession, and these are almost exclusively involving Tax Court. In my opinion we need a case study book, based on real and typical appraisal problems that confront most personal property appraisers at one time or another over his/her career. Of course, these problems would be accompanied by solutions, based on regulations and rules that are contemporary with the date of publication. Contributions to these case studies could come from ASA appraisers around the nation; the solutions might be accompanied by further comments from members of the Personal Property Committee, or by those senior members in a position to offer legal and professional overviews. I see this as a book that evolves, as issues change, new laws come onto the books, and the complexity of the appraisal profession increases. In speaking with ASA appraisers from around the country I see a real need for a book that addresses real problems faced by real appraisers on a daily basis. Many appraisers work in relative isolation, primarily those who may be the only appraiser within the area. With whom do they conferwhen faced with a valuation dilemma? There’s real comfort in speaking with another personal property appraiser about a particularly difficult exercise in valuation and getting feedback on your own solution of the problem. My thought is that a book of appraisal problems and solutions would serve as a substitute friend in need. At least let’s think about it.
For further information on Blockage and/or Recent Court Cases, the following are available:
Blockage Handbook– This is the book produced to accompany the Blockage Seminar offered in Seattle in 1993. The handbook is available for $35. Send your request and payment to Janella Smyth, ASA, P.O. Box 12465, Raleigh, NC 27605.
Principles of Valuation course PP204 concentrates on recent court cases that affect appraisers. This course may be taken by Accredited Members and Senior Appraisers as a refresher and for re-accreditation credit. It is currently offered toAMs and ASAs at a half-tuition rate. (Candidates and others who have not taken the core Principles of Valuation Courses 201 through 203 should take the courses in order.) See page 42 of this issue or contact ASA headquarters for course scheduling information.
The ASA International Education Department is currently offering a one-day seminar, “Recent Court Decisions: Implications for Personal Property Appraisers.” See page 44 in this issue for a listing of seminar offerings, dates and locations.
The textbook The Appraisal of Personal Property © 1994, includes chapters devoted to related subjects, including “Revenue Ruling 59-60 An Alternative to Blockage in the Valuation of Artists’ Estates,” written by Terry Melia, CPA; “Discounts Applied to Value,” which discusses both depreciation and blockage; “Legal Guidelines for Appraisals Used to Substantiate Charitable Contribution Income Tax Deductions,” written by Corrine Richardson, J.D., M.V.S. This textbook is available for purchase for $32.50 from ASA Publications Order Department, P.O. Box 17265, Washington, DC 20041.