Practice · Foundations and legacy · Glossary
Blockage discount
A blockage discount lowers the appraised value of a large holding of one artist’s work. The reasoning is that a buyer would pay less than retail for more works than the market can absorb at once. It matters at death, when an estate must value an inventory it cannot sell in a single season.
Published by ArtisDomus, written by Polina Surina.
The discount is an argument about value, and no tax is forgiven. The estate argues that four hundred works together are worth less than four hundred times one. The tax authority argues the opposite. Whether the argument is allowed depends on the country, and the two that matter most for a European collection give opposite answers.
Where it applies
US courts allow it, and UK law rules it out.
United States courts have allowed the argument for more than fifty years and set its size case by case. Two things decide it: how long the inventory would take to sell, and how well known the artist is. A better-known artist has a deeper market, so the discount is smaller.
The United Kingdom rules it out by statute. Section 160 of the Inheritance Tax Act 1984 values property at its open market price. It adds that this price must not be assumed lower because the whole property goes on the market at the same time. That clause was written to shut out exactly this argument.
For a collection linked to both countries, the difference is large. The same works, in the same market and the same week, can receive very different tax values. The result depends on where the owner was resident, and separately on where the works are situated.
What it has been worth
Smith, O’Keeffe and Warhol are the blockage cases the courts decided.
- Smith 1972
- 425 unsold sculptures. The estate returned them at $714,000 and claimed a 75 per cent discount. The Revenue argued for $4,284,000. The court set $2,700,000, a discount of about 37 per cent.
- O’Keeffe 1992
- About 400 works, agreed at $72,759,000 when valued one by one. The court sorted them by quality, uniqueness and salability. It allowed 25 per cent on works that could sell in the short term and 75 per cent on works that would take years. Overall the discount came to about half.
- Warhol 1994
- Christie’s proposed discounts averaging 60 per cent. The court applied 25 per cent. It reasoned that Warhol was better known than Smith or O’Keeffe, so the market would absorb more.
- Elkins 2014
- A different discount. Part shares in 64 works by many artists, held with three children under an agreement that barred any sale without everyone’s consent. The estate claimed 44.75 per cent and the Revenue allowed nothing. The Tax Court set a nominal 10 per cent. The Fifth Circuit found no evidence for that figure and ruled for the estate, with a refund of $14,359,508.21.
Elkins is the case most often mistaken for a blockage case. What was discounted there was the estate’s part share in each work, which could not be sold without the consent of all co-owners. The case turns the usual assumption around. The children said they would never sell, and that was treated as a reason a buyer would want a deeper discount. Family attachment, properly evidenced, was worth money.
How it differs
Deferral, extensions and marketability discounts are separate rules.
The US option to pay estate tax in instalments, under section 6166 of the Internal Revenue Code, does not reach a collection at all. Section 6166(b)(9) treats an asset not used in a trade or business as passive. A collection held for pleasure or for growth in value is passive by that definition.
Illiquidity has its own narrow rule: an extension of time to pay. Under section 6161(a)(2) it is granted for reasonable cause. Under the regulation, a sale at fair market value, where a market exists, is not ordinarily an undue hardship. Finding it hard to sell is different from being unable to sell.
A marketability discount on a company interest is also a separate matter. Blockage applies only to a quantity of one artist’s work reaching one market. It does not carry over to shares or to a mixed collection by many artists.
For the deadlines, the four routes and each country’s rules, see What happens to an art collection when the collector dies.
Sources
- Inheritance Tax Act 1984, s. 160
- 26 U.S.C. §§ 6166, 6161; Treas. Reg. § 20.6161-1
- Smith: 57 T.C. 650
- O’Keeffe: T.C. Memo 1992-210
- Warhol: 629 N.Y.S.2d 621
- Elkins: 767 F.3d 443