by Elin Lake Ewald, ASA

Ovethe last five years, the word BLOCKAGE has perhaps become the most overworked word in the appraisal vocabulary, akin to the arworld’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, ithe related seminar handbook (Section 2, point A), defined blockage as “discounapplied to a sum of value where a quantity of very similaproperties would impaca market at one dateIf suca quantity would have an adverse effect on the market a discounwhich 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 Servicea process that is applied to one type of evaluation (fair markevalue) for a particulapurpose (estate taxation) should be applied to an evaluation (fair market value) for another particular purpose (charitable contribution). But there are specific instances in which thIRS wilallow a discounione 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 shareA situation in which we pre­sented a seof facts before the IRS held that partial interest in a work oart should be discounted under certain circumstancesAlthough the IRS initially opposed the concept, it was successfully argued in a case that resulted in a 25% reduction to the fair markevalue of fractional interests in works of art (Personal Property Journal, Winter 1995pp. 16-20).

Since there is no set formula fodetermining blockageand because the IRS wilconsider 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 posedshorhypothetical cases will be laid outMy 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 situationsAlthough 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.

Historicallythe concepof blockage originated with business valuation. The firsapplication of the concepof blockage for the evaluation oworks of fine art (Estate of David Smith57 T.C.M650 1972) was based on the sale of a large number of securitiesSection 20.2031-2(b) of the Federal Estate Tax Regulations, in respect to large blocks of stock, (e) states:

If the executocan show thathe block of stock to be valued is so large in relation to the actual sales on the existing market thait 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 marketas through an underwriter, may be a more accurate indication of value than the market quotationsComplete 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 MerceCapital, Memphis Tennessee(Volume 6Nos2,31994) 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 icould nobe sold on quoted market at its quoted prices within a reasonable time by skilled brokers following prudent practices foliquidation. Apparentlthere have not been generous discount blockages granted in recent decisions, and when thehave been given they have proved skimpy [5% inAdair vCommissioner (5T.C.M705. 1987)]JMichaeJuliusASACFAauthor of the two-pararticle“Blockage Discounts and Restricted Stocks,” in Value Addedposes several questions to business valuation appraisers in estimating a blockage discountWe have extrapolated from his list a series of questions that we have transformed into questions for personal property appraisers to use in determining whether onot to apply blockage to the charitable contribution of works ofart:

·   Whais the size of the block o(type oartwork) relative tthe 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 althe related artworks on the public market?

·    What has been the trend oprices of other similar artworkin 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.C728 (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 othe 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 fopurposes 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 ta collection of approximately 50 textiles, and including numerous individual sculptures, paintings, and other armediaThe attorney for the estate suggested thablockage could be applied because of the sheer quantity of the materials(We thought that no blockage could be effectively applied since the sale oanyone itemorgroup of itemswould not impacon the market value in these particular categoriesand that this would be an inappropriate usage othe blockage discount.)

·   An inquiry from the Midwest asks about the dona­tion of a collection of 500 prints by the same artistsecond call revealed that the prints being valued werfrom different periods ithe artists long life, and that the number oprints 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 tthat 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 thsalability and quality of the various pieces remaining in the estate.)


In law one refers to documented cases in which, for instance Jones v. Smith might prove the legal point that you cannot entea 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 refethat involve the appraisal professionand these are almost exclusively involving Tax Court. In my opinion we need a case study book, based on real and typical appraisal problems that confronmost personal property appraisers at one time or another over his/her career.  Ocourse, these problems would be accompanied by solutions, based on regulations and rules thaare contemporary with the date of publication.  Contributions to these case studies could come from ASA appraisers around the nationthe solutions might baccompanied by further comments from members of the Personal Property Committee, or by those senior members in a position to offer legaand professional overviews. I see this as a book that evolvesas issues change, new laws come onto the booksand 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 withithe 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 lets thinabout 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 $35Send your request and payment to Janella Smyth, ASAP.OBox 12465RaleighNC 27605.

Principleof Valuation course PP204 concentrates on recent court cases that affect appraisersThis course may be taken by Accredited Members and Senior Appraisers as a refresher and for re-accredita­tion creditIis 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.


Winter 1996