Blockage discount

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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. [1] [2] [3]

Discounts and allowances reductions in the basic prices of goods or services

Discounts and allowances are reductions to a basic price of goods or services.

Fair market value (FMV) 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 extrapolation. Fair market value differs from the intrinsic value that an individual may place on the same asset based on their own preferences and circumstances.

Depreciation Decrease in asset values, or the allocation of cost thereof

In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease in value of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.

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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 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. [4] 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. [5] 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 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. [4] Therefore, accountants and estate planners for artists plan with such eventualities in mind. [6]

Georgia OKeeffe American painter

Georgia Totto O'Keeffe was an American artist. She was best known for her paintings of enlarged flowers, New York skyscrapers, and New Mexico landscapes. O'Keeffe has been recognized as the "Mother of American modernism".

Andy Warhol American artist

Andy Warhol was an American artist, director, and producer who was a leading figure in the visual art movement known as pop art. His works explore the relationship between artistic expression, advertising, and celebrity culture that flourished by the 1960s, and span a variety of media, including painting, silkscreening, photography, film, and sculpture. Some of his best known works include the silkscreen paintings Campbell's Soup Cans (1962) and Marilyn Diptych (1962), the experimental film Chelsea Girls (1966), and the multimedia events known as the Exploding Plastic Inevitable (1966–67).

Internal Revenue Service Revenue service of the United States federal government

The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The IRS is responsible for collecting taxes and administering the Internal Revenue Code, the main body of federal statutory tax law of the United States. The duties of the IRS include providing tax assistance to taxpayers and pursuing and resolving instances of erroneous or fraudulent tax filings. The IRS has also overseen various benefits programs, and enforces portions of the Affordable Care Act.

The IRS has stated that carrying costs and opportunity costs are relevant factors for consideration in blockage discounts, along with time to market. [7]

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 costs related to perishability, shrinkage (leakage) and insurance. Carrying cost also includes the opportunity cost of reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes. When there are no transaction costs for shipment, carrying costs are minimized when no excess inventory is held at all, as in a Just In Time production system.

In commerce, time to market (TTM) 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. A common assumption is that TTM matters most for first-of-a-kind products, but actually the leader often has the luxury of time, while the clock is clearly running for the followers.

Art valuation issues

See also

Art 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.

Art valuation

Art valuation, an art-specific subset of financial valuation, is the process of estimating either the market value of works of art. As such, it is more of a financial rather than an aesthetic concern, however, subjective views of cultural value play a part as well. Art valuation involves comparing data from multiple sources such as art auction houses, private and corporate collectors, curators, art dealer activities, gallerists, experienced consultants, and specialized market analysts to arrive at a value. Art valuation is accomplished not only for collection, investment, divestment, and financing purposes, but as part of estate valuations, for charitable contributions, for tax planning, insurance, and loan collateral purposes. This article deals with the valuation of works of fine art, especially contemporary art, at the top end of the international market, but similar principles apply to the valuation of less expensive art and antiques.

Work of art aesthetic physical item or artistic creation

A work of art, artwork, art piece, piece of art or art object is an aesthetic physical item or artistic creation. Apart from "work of art", which may be used of any work regarded as art in its widest sense, including works from literature and music, these terms apply principally to tangible, portable forms of visual art:

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In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management and patent valuation. It was used in industry as early as the 1700s or 1800s, widely discussed in financial economics in the 1960s, and became widely used in U.S. Courts in the 1980s and 1990s.

Taxation in the United States taxes are imposed in the United States at each of levels; taxes on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees

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Valuation (finance) process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on assets or on liabilities. Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability.

Adjusted present value (APV) is a valuation method introduced in 1974 by Stewart Myers.

Market value or OMV is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may or may not differ in some circumstances.

Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value, for real property. Real estate transactions often require appraisals because they occur infrequently and every property is unique, unlike corporate stocks, which are traded daily and are identical. The location also plays a key role in valuation. However, since property cannot change location, it is often the upgrades or improvements to the home that can change its value. Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes an appraisal report is used to establish a sale price for a property.

The Rothko case was the protracted legal dispute between Kate Rothko, the daughter of the painter Mark Rothko; the painter's estate executors; and the directors of his gallery, Marlborough Fine Art. The revelations in the case of greed, abuses of power and conspiracy by financial interests in the art world were described by the New York Court of Appeals, the highest court of New York state, as "manifestly wrongful and indeed shocking," serving as a cautionary tale for both artists and their gallerists.

Comparables is a real estate appraisal term referring to properties with characteristics that are similar to a subject property whose value is being sought. This can be accomplished either by a real estate agent who attempts to establish the value of a potential client's home or property through market analysis or, by a licensed or certified appraiser or surveyor using more defined methods, when performing a real estate appraisal.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.

An appraiser, is one who determines the fair market value of property, real or personal. In England the business of an appraiser is usually combined with that of an auctioneer, while the word itself has a similar meaning to that of "valuer".

Valuation using discounted cash flows is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. The cash flows are made up of the cash flows within the forecast period together with a continuing or terminal value that represents the cash flow stream after the forecast period.

In economics, valuation using multiples, or “relative valuation”, is a process that consists of:

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Art dealer person that buys and sells works of art

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The following outline is provided as an overview of and topical guide to finance:

The Income Approach is one of three major groups of methodologies, called valuation approaches, used by appraisers. It is particularly common in commercial real estate appraisal and in business appraisal. The fundamental math is similar to the methods used for financial valuation, securities analysis, or bond pricing. However, there are some significant and important modifications when used in real estate or business valuation.

The German income approach is the standard approach used in Germany for the valuing of property that produces a stream of future cash flows.

Art market marketplace of buyers and sellers trading in the commodities, services, and works-of-art associated with the various arts

The art market is represented by a marketplace of buyers and sellers trading in the commodities, services, and works-of-art commonly associated with the various arts. The art market is also concerned with the production of new art which enters the art market. The art market is an example of one type of marketplace, among many different types of markets which occur in economics. In particular, the art market has many similarities with other marketplaces where buyers and sellers meet, as well as significant distinguishing factors indicative of its differences from other types of markets in economics.

References

  1. ↑ In re Warhol, No. 824/87, 1994 WL 245246 * 1 (Surr. Ct., N.Y. Co. 1994).
  2. ↑ Grosz v. Serge Sabarsky, Inc. [ permanent dead link ], 24 A.D.3d 264, 806 N.Y.S.2d 498, 500 (1st Dep’t 2005).
  3. ↑ Lerner and Bresler, Art Law: The Guide for Collectors, Investors, Dealers, and Artists, Practising Law Institute, 1998, p.1157 et seq.. ( ISBN   978-1402406508, 3d edition)
  4. 1 2 Inde, Vilis, Art in the Courtroom, Praeger, 1998, p. 158. ISBN   978-0-275-95971-5
  5. ↑ Establishing a Value is Important!, Planned Giving Design Center, LLC. 2009.
  6. ↑ Englebrecht, Valuation of Art Objects for Estate Tax Purposes, The CPA Journal, 09/02/2002.
  7. ↑ Lerner and Bresler, pp. 1354, 1364.

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.

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