Basquiat Estate and Blockage Discount

Fellow appraiser and art restorer Peter Kostoulakos sent me an interesting article posted on Business Insider about the Jean-Michel Basquiat estate and an IRS claimed under valuation due to the application of a blockage discount.  The estate has already paid $8.5 million in estate taxes, but the IRS is making a claim for an additional $10 million in tax and penalties.

Interesting for appraisers, was the using of a blockage discount which substantially reduced the value of the estate. Before applying the discount the estate was valued at $127 million.  After the blockage discount the estate was valued at $72 million (discounting the value by over $54 million). After auditing the estate, the IRS determined the value of the estate to be $138 million of which $131 million was art. A lawsuit was filed after the estate and the IRS could not reach an agreement.

This should be an interesting case to follow and to see how the court rules on the blockage discount assigned by the estate.

Business Insider reports

The lawsuit, filed in May, says the family paid $8.5 million in estate taxes after Basquiat's mother died. That staggering sum was largely based on her share of the family's valuable collection.

The lawsuit claims that after the family paid the government, the IRS wrongfully determined the collection was worth much more and demanded nearly $10 million in additional taxes and penalties.

The tax fight began after Jean-Michel’s mother, Matilda Basquiat, died at 74 in 2008 in Brooklyn, leaving behind an extraordinary fortune, but no will.

She and her estranged husband, Gerard Basquiat, each owned a 50-percent stake in the estate of their son after he died of a drug overdose at 27 in 1988. That estate holds a treasure trove of valuable modern art, including 1,351 paintings and drawings by Jean-Michel, as well as 36 works by other well-known artists including Andy Warhol, according to the lawsuit.

After Matilda died, her half of Jean-Michel’s estate was split between her husband and their two daughters.

In 2010, Gerard paid the IRS $8.5 million in death taxes for his wife. In the tax return, Gerard valued Matilda's half-interest in their son's estate at $36 million. An appraisal of the estate's artwork by auction house Sotheby's had determined the value, according to court papers.

But a subsequent IRS audit of the estate painted a different picture. Uncle Sam determined Jean-Michel's estate is worth $138 million — with the artwork alone valued at $131 million, records show.

The government put Matilda's stake in her son's estate at $69 million, and said her family owed an additional $7.3 million in death taxes, records show. The IRS also levied nearly $2 million in penalties against the family for having filed a late tax return and for undervaluing the assets.

Gerard Basquiat filed the lawsuit last spring after he and the IRS couldn't reach an agreement in the estate's valuation.

The lawsuit claims the IRS erred in its assessment, mainly by disregarding a blockage discount on the estate.

A blockage discount is a legal concept in which an estate claims that the sale of its artwork all at once would flood the market and significantly depreciate the value of each individual piece. The estate's taxes are determined after applying the discount.

In his lawsuit, Gerard Basquiat says that the art collection in Jean-Michel's estate is worth $127 million. He claims the estate is entitled to a blockage discount of $58.4 million. After applying the discount, the entire estate's value is only $72 million, according to the lawsuit.

Source: Business Insider