Auction vs Gallery

Fellow appraiser Kathi Jablonsky sent me an interesting article from the Artsy Blog. They have published some interesting articles, many being very useful for appraisals and on the various art markets. This article looks at difference between auctions and gallery sales. The article points out different situations where auctions and galleries competed. For appraisers who use different market levels and standards of values, the article is excellent for understanding and processing the various dynamics.

Artsy reports

Compared with the beach a few blocks away, Miami’s convention center may not look like much. But for a week each December, the convention center, home to Art Basel in Miami Beach, becomes a paradise for collectors. The hallways and gallery booths hold wonderful surprises. The 82,000 visitors attending this past December could see close to 10,000 works of art worth an estimated $3.5 billion. Just one month before, the auction houses Sotheby’s, Christie’s, and Phillips had offered work by many of the same artists. Those November auctions, which feature the most expensive art available, included close to 1,900 works which sold for a combined $2.3 billion.

With so many works for sale by the same artists, a recurring question for collectors is whether galleries or auction houses offer buyers a better deal. Based on my experiences as a collector, art advisor, and former President of the Americas for Christie’s, the answer depends on context and the type of work being sold. But there are some general principles that explain the relationship between the price of artworks at galleries and those fetched at auction (including the buyer’s premium).

If an artist trades infrequently at auction, then that artist’s auction prices are likely to be lower than gallery prices
Galleries spend considerable time and money building and cultivating a buyer base for their artists. Because artists create unique objects, and collectors’ appetites for the same artist can vary widely, finding a buyer for each work takes time. Ask three people at a gallery opening to point out their favorite work, and you will likely get three different answers. Because most artists have a small buyer base, it is hard to know if a buyer who is both aware of the artist and interested in the specific work for sale will emerge on the day of an auction. If the work sells, then it will most likely go for less than what the gallery would ask for similar work. As a rule of thumb, artists whose work appears at auction no more than three times a year will likely cost less at auction than equivalent work at a gallery. 

Galleries rationing work by “hot artists” tend to price it too low, leading to price spikes in the auction market
Galleries experience both pleasure and pain managing the sales of work by “hot artists.” To get works placed with the “right” collectors and institutions, galleries may offer discounts relative to what other “less desirable” collectors may be willing to pay for it. The gallery may also be reluctant to jack up prices too quickly, out of concern for potential problems down the road if the artist’s career pauses. But when work by the artist leaks into the auction channel, buyers who were unable to purchase work through the gallery begin crowding into the auction market, driving up the price. Speculators may also jump into the game, helping push auction prices significantly above gallery prices.

Njideka Akunyili Crosby is a recent example of this phenomenon. After receiving a Yale MFA and a 2011 stint as an artist-in-residence at the Studio Museum in Harlem, her distinctive work started to appear in group shows and a few one- or two-person exhibitions at galleries focused on emerging artists. Her breakout year, from an institutional perspective, came in 2015, when the Hammer Museum in Los Angeles and the New Museum in New York featured her work in its Triennial. The commercial art world was not far behind when Victoria Miro Gallery in London announced it would represent her. Crosby’s highly anticipated first show opened on October 4, 2016. In an interview with The Economist, the gallery said that more than a dozen public institutions were vying to buy her work, and that the gallery was offering them paintings for less than $100,000. Given institutional demand and its preference to see the work in public collections, the gallery said it did not anticipate selling any works from the show to private collectors.

While artists and galleries aspire to control prices, much is beyond their control. In Crosby’s case, it was the lucky private collectors who already owned her work who profited most. Shortly after the Victoria Miro show closed, Sotheby’s included a painting by the artist in its November 2016 Post-War and Contemporary Art evening sale. With a presale estimate of $200,000 to $300,000, it sold for $1.1 million (including buyer’s premium). Four months later, Christie’s sold a slightly larger work in its London Post-War and Contemporary Art evening sale for $3.1 million (including buyer’s premium). By trying to keep prices low, the artist and gallery effectively enabled early collectors to enjoy windfall gains, rather than themselves. The takeaway: Buying a hot artist at auction is unlikely to be a deal, but may be the only option under these circumstances. 

When an artist’s career is in a slump, gallery prices are likely to be significantly higher than auction prices
As an artist’s career develops, galleries raise prices to not only reflect higher demand, but also to signal to buyers that the artist is on an upswing. They do this because many buyers find it hard to evaluate an artist’s importance and sometimes use price increases as confirmation the artist is doing well. But if demand slumps for an artist’s work, galleries hate lowering prices, fearing that doing so will publicize to collectors that the artist’s career has paused, or worse. But when a work by the artist comes up at auction, it sells for its fair market value, which is far below the artificially high price galleries continue to ask for it.

To protect the innocent, I will avoid naming artists who are in this predicament. But it is easy to figure out by comparing offering prices at galleries with readily available auction pricing data. The good news for collectors is that if you love an artist in this situation, you should consider buying their work at auction. Many collectors use alert systems offered by Artsy, Artnet, and other providers to let them know when a work by an artist they are interested in is coming up for sale at auction.   

Masterpiece collectors are often willing to pay more for something at auction than privately
Masterpiece collectors know that there is only a very small pool of potential buyers with the means and desire to spend tens of millions on a work of art. As a result, it is difficult for them to know with confidence the fair market value of an object. A recent example was a beautiful Constantin Brancusi bronze head of a sleeping woman, La muse endormie (1909–13), offered at Christie’s in May 2017 with a presale estimate of $25 to $35 million. Nothing like it had been on the market for years. What was it worth? If offered privately, even high-rolling collectors might balk at paying a big price for it, because the price had not been publicly validated. This resistance can drop away during an auction when they see other bidders going after it. Auction house specialists are full of stories of fruitlessly trying to sell a masterwork privately for a big number, only to see the same clients bid against each other when the work goes on the auction block. They often end up paying more than the price initially offered to them. That Brancusi? It ended up selling for $57.3 million.

Only in very liquid markets are auction and gallery prices largely the same, but even then, short-term differences can reward the diligent buyer
A liquid market creates visibility around the fair market value of an artist’s work, making it hard for pricing differentials to persist between the two sales channels. The Yayoi Kusama market, for example, tends to be quite liquid because she has been so prolific. Buyers do not have to search high and low to find something to buy. If they’re unable to get something from one of the galleries that represent her, they can buy something at auction, or at an upcoming art fair, or call around to the numerous galleries that offer her work on the secondary market. Comparison shopping by diligent buyers forces similar work to sell for similar prices. But even in the Kusama market, there are periods where sale prices at auction are higher, only for the relationship to flip. This happens because the number of Kusama “shoppers” at a given point in time is small. So if they act more on impulse, with little or no comparison shopping, they risk overpaying in one channel. 

Capturing the deal opportunities discussed above requires research and discipline. But research and discipline can transform a casual buyer into a smart collector. Start with a short list of artists you would ideally like to acquire. Monitor whether their work comes up at auction. When it does, talk with auction house specialists to get their perspective on the work and how they arrived at their presale estimates. These are very easy conversations to have because specialists love speaking with potential buyers. Stay abreast of news about your shortlisted artists so you can sense whether changes may be afoot in their career trajectories. Key indicators to follow include changes in gallery representation, the frequency with which the artist is included in group shows, whether museums are supporting the artist via exhibitions and acquisitions, and the breadth and depth of press coverage. Lastly, when work by your short-listed artists appear in gallery shows or at art fairs, always ask about pricing. Even if the work has already sold, gallery staff will often be willing to share intelligence on sale prices. By following these practices and disciplines, buyers increase greatly the odds of getting a good deal.

Source: Artsy

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Salvator Mundi Swapped for a Yacht

Fellow appraiser Cindy Charleston Rosenberg sent me an interesting article from the UK's Daily Mail about the bidding and subsequent trade of Leondardo Da Vinci's Salator Mundi for a mega yacht, said to also be valued at $450 million.

The mail reports two Princes sent representatives to bid on the painting, one from Saudi Arabia the other from United Arab Emirates. The two bidders, and allies thought they were bidding against the Qatari ruling family, according to the article rials of Saudi Arabia and the UAE, and the bidding hit $450 million. And if correct, certainly an outlier in value, as according to the article the painting was previously offered to the Quattari's for $80 million and some think that is closer to the real value of the work.  Later due to pressure on the purchase the record setting painting it was swapped for a mega yacht, the Topaz.

The Daily Mail report

• Leonardo Da Vinci's 'Salvator Mundi' sold at an auction last November for  a record-breaking $405.3million
• It was later revealed the painting's buyer was Saudi Prince Bader bin Abdullah
• Palace insiders said the purchase was on behalf of the country's crown prince Mohammed Bin Salman, whose regime was criticized for the purchase
• De-facto United Arab Emirates ruler Mohammed Bin Zayed also sent a representative to bid on the painting at the Christie's New York auction
• Neither knew the other was bidding, instead they both feared losing the auction to reps from the Qatari ruling family - fierce rivals of UAE and Saudi Arabia
• Qatar's ruling family was offered the painting just a year earlier for $80 million
• Salman's $450 million purchase was condemned by critics of his regime 

After facing criticism, he struck a deal with his Emirati counterpart to swap the painting for a superyacht also worth $450 million

Two Arab princes accidentally cost themselves $450 million in an anonymous bidding war over a Da Vinci painting - because each thought the other was their rival Qatar, according to palace sources.

Leonardo Da Vinci's 'Salvator Mundi' sold at an auction last November for an eye-watering $450.3 million.

Documents leaked to the New York Times the following month revealed the buyer was Saudi Prince Bader bin Abdullah.

Palace insiders said the purchase was on behalf of his close friend, the country's crown prince Mohammed Bin Salman.

But neither Arab ruler knew the other was bidding, instead they both feared losing the auction to reps from the Qatari ruling family.

Qatar is fierce Gulf rivals of Saudi Arabia and the UAE and its ruling family is well-known for its interest in high end art.

'The bidding started to get high, and each of them thought they were bidding against the Qataris, and didn't want them to get it,' said one source close to the Emirati leader.

'So they gave their proxies instructions, saying 'you can go as high as you want, just make sure you get it'.

'It got to $450 million and the Emiratis gave up. Then s**t hit the fan when the record came out.

'MBZ [Mohammed Bin Zayed] told Salman: "That was us bidding for it, why didn't you tell me?"'

The Emirati palace source revealed a further twist that heightened the costly bungle.

'The Qataris were offered that painting one year before for just $80 million, and that's more in the ball park of what it's really worth,' said the source.

'But they looked at it, and they felt it was too Christian for their collection, so they declined… The Saudis paid way, way too much for it.'

Had the seller, Russian billionaire Dmitry Rybolovlev, made the sale to the Qataris he would have sustained a significant loss, having reportedly paid Swiss art dealer Yves Bouvier $127.5 million for the canvas in 2013.

As it happened, the Russian tycoon turned a profit of a cool $322.8 million.

Salman's $450 million purchase was condemned by critics of his regime.

It came during a time when the Saudi government had implemented austerity measures due to the country's ailing economy, and the crown prince was conducting a corruption crackdown, arresting family members over their alleged profligate self-enrichment.

Under pressure to save face and get the now politically toxic painting off his hands, sources said the crown prince struck a deal with his Emirati counterpart to swap the painting for a superyacht.

'They came up with this idea. MBZ had a yacht, it's called the Topaz, and it was valued at $450 million, exactly what MBS [Mohammed Bin Salman] paid for the painting. So they did a swap.,' the source said.

'MBS signed the Da Vinci over to the UAE Ministry of Culture so it could go to the museum, and he got the yacht.'

A week after the auction the Emirati government announced the new addition to its collection in the Louvre Abu Dhabi, much to the surprise of art fans around the world.

Another source close to Salman confirmed that both princes had bid on the painting, and corroborated details of the swap for the yacht.

The deal, which was made in secret between the Saudi and Emirati princes, left Salman with a total of three giant and opulent pleasure boats.

He already owned one superyacht called The Serene, bought in 2014 from another Russian billionaire, vodka tycoon Yuri Shefler.

Salman is said to have spotted the 440ft vessel while vacationing in the south of France, and immediately offered Shefler $550 million for it.

Within hours the deal was done, and the Russian moved off the boat by the next day.

At the time the yacht was one of the world's three biggest according to Forbes Magazine, boasting 15 rooms, a nightclub, cinema, climbing wall, seawater swimming pool, library, health spa, underwater viewing room, gym and two hot tubs.

The ship came equipped with two helipads, a helicopter hangar, a submarine hangar and multiple swimming pools.

In June the same year the Saudi crown prince purchased a yacht now valued at $125 million from Californian investor Ronald Tutor, a former business partner of President Donald Trump's close friend Tom Barrack.

Tutor told the New York Times the Yacht, named Pegasus VIII by Salman, cost about $60 million.

Source: Daily Mail 

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Blockage Discounts and the Estate of Lisa de Kooning

Fellow appraiser Xiliary Twil sent me an interesting blog post from the Center for Art Law which looks at blockage discounts. The estate of Lisa de Kooning (died at age 56 in 2012) daughter of Dutch-American artist Willem de Kooning discounted works of her father by 60% for paintings and 85% for sculptures claiming blockage discounts. The IRS claimed the estate could not use blockage discounts. The article from the Center for Art Law looks at when applying a blockage discount is appropriate.

Well worth reading.

The Center for Art Law reports

In 2017, the estate of Lisa de Kooning filed a petition in the U.S. Tax Court after the Internal Revenue Service (IRS) increased the value of the de Kooning estate by $231 million, resulting in a $92 million tax bill. The estate of Lisa de Kooning consisted of a large collection of artwork, including fifty-seven paintings, eighty-three sculptures, and fifty-one drawings, by her father, Willem de Kooning, the famous Dutch-American abstract expressionist, who died in 1997. Originally, the estate of Lisa de Kooning had appraised the collection at $231.4 million; but when determining the total estate tax owed, the estate discounted the value of the collection by nearly sixty percent for the paintings and eighty-five percent for most of the sculptures. The estate intended these discounts to accommodate the “block” of artwork that could be introduced into the market. By increasing the estate’s tax liability, the IRS determined that the estate could not apply “blockage discounts” to the value of the artwork.

According to regulations and case law, when determining the tax liability of an artist’s estate, the estate must not only value the individual pieces of art, but also consider whether the aggregate value of the art should be reduced, in order to adjust for the potential effect on the art market of a large collection of art by a single artist becoming available at one time. “Blockage discounts” reflect the economic concept that introducing a large “supply” of art by the same artist onto the market would instantly (albeit temporarily) decrease the price of the individual works. In order to determine the appropriate value of the estate for the purposes of tax liability, appraisers apply a “blockage discount” to reflect the realities of the marketplace economics.

Unfortunately for appraisers, estate executors, and artists, estate tax statutes and regulations do not clearly outline when and how an estate can apply a blockage discount to a large collection of art held by an estate. The following discussion will examine the legal foundation for blockage discounts and the application of these concepts by the Tax Court to artists’ estates.

Legal Basis for Blockage Discounts
The concept of blockage discounts is rooted in the basic standard for determining the value of an estate: “fair market value.”  According to estate tax regulations (26 C.F.R. § 20.2031-1), the fair market value of property held by the estate is “the price at which the property would change hands between a willing buyer and a willing seller.” A “willing buyer” or a “willing seller” means that neither party are compelled to buy or sell, forcing the price to be artificially high or low. Under the regulations, both parties participating in this sale would have reasonable knowledge of the relevant facts, and the market in which the sale would occur is the market where the item at issue is most commonly sold to the public. When determining the value of a large collection of art belonging to a single artist, the estate must consider the potential buyer and market for the collection as a whole, as well as the individual works of art.

In order to determine when to apply a blockage discount, estate appraisers and executors rely on the estate tax regulation for valuing a large number of stock shares (26 C.F.R. § 20.2031-2). Known as the “blockage rule,” the regulation permits an executor of an estate to apply a blockage discount if he or she “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 concept of supply and demand, that a large supply would naturally diminish the value unless the demand rises to meet the supply, underlies this rule.

Application of the Blockage Discount by the Tax Court

The courts have applied the principles and concepts outlined by this securities valuation regulation to determine the value of a large block of art held by an estate. The U.S. Tax Court first applied the concept of blockage discounts to art in 1972 in the case Estate of David Smith v. Commissioner of Internal Revenue.

Estate of David Smith v. Commissioner of Internal Revenue

David Smith (1906-1965), an American artist known for abstract metal sculpture, had possessed 425 pieces of his sculpture at the time of his death. He received mixed critical acclaim during his lifetime for his work, which typically consisted of very large pieces of metal sculpture, but gained national recognition after his death.

The executors of Smith’s estate estimated its value by calculating the individual price of each work at the time of Smith’s death, and then totaled these values for a sum of $4,284,000. The estate then discounted this figure by seventy-five percent, claiming that the works could only be sold at the time of death to a bulk purchaser acquiring the art for resale. Such a purchaser, according to the estate, would only pay twenty-five percent of the art’s aggregate value with the understanding that an acceptable profit could be recovered only over an extended period of time. The IRS dismissed the estate’s block discount and valued the works at $4,284,000, the full fair market value. According to the IRS, selling all of the sculptures simultaneously would not have had an adverse impact on the fair market value of each item. The Smith estate then petitioned the Tax Court for further review.

The Tax Court agreed with the Smith estate that the “blockage rule,” previously used in the securities context and outlined in the estate tax regulations, should apply to collections of art. The Tax Court explained that the IRS should have considered that a willing buyer of one piece of art would take into account that 424 other similar items were being offered for sale at the same time, and the buyer would lower his or her price accordingly. The court emphasized that a large number of similar works would significantly impact the auction market, the typical market for this type of property, and any valuation analysis should account for this material factor. In applying the blockage discount, the Tax Court also considered Smith’s reputation, the size and quality of the 425 sculptures, and the location of the bulk of these sculptures, as well as other material factors.

While the Tax Court agreed with the Smith estate about the application of the blockage discount, it ultimately concluded that a seventy-five percent discount was too large and held that the fair market value of the 425 sculptures at the moment of Smith’s death was $2,700,000, with a blockage discount of thirty-seven percent. The Tax Court did not provide any specific analysis about how it reached this thirty-seven percent discount. The executors of the estate appealed the Tax Court decision to the U.S. Court of Appeals for the Second Circuit in regard to a separate issue related to the deduction of administration expenses.

Estate of Georgia O’Keeffe v. Commissioner of Internal Revenue

About twenty years later, the Tax Court considered another blockage discount issue for the estate of Georgia O’Keeffe (1887-1986), an American painter who died at the age of ninety-eight, and whose career spanned most of her life. At the time of her death, O’Keeffe’s estate comprised approximately 400 works or series that she had created. In her will, O’Keeffe had bequeathed forty-two works to eight museums. The total value of these bequeathed works was $22,575,000. As calculated by the estate, the total sum of the individual fair market values of O’Keeffe’s works on the date of her death exceeded $72,759,000.

When determining the tax liability of the estate, experts of the estate applied a seventy-five percent blockage discount. The estate assumed, when conducting the fair market value analysis, that all of the works in the estate could be hypothetically “sold” at the date of death only to a single buyer as a bulk purchase. The IRS did not follow this analysis, but divided the works in the estate into two categories: bequeathed art and remaining art. The bequeathed works were not available for sale, according to the IRS, and thus did not require a blockage discount. The agency then applied a discount of thirty-seven percent to the remaining art, finding that the estate owed $6,014,493 in taxes. The estate petitioned the Tax Court for review of this deficiency.

The Tax Court in Estate of Georgia O’Keeffe disagreed in some part with the analyses of both the estate and the IRS. First, the Tax Court objected to the IRS not applying the discount to the bequeathed art, as the fair market value analysis assumes that all works held by the estate are available for sale, regardless of the final disposition of the property. However, the Tax Court also rejected the estate’s assumptions of a single buyer and that the property must change hands at the date of death, because this approach ignores the regulatory condition that the “willing buyer and willing seller” would act without compulsion. 

The Tax Court ultimately held that a blockage discount should apply. Acknowledging that different works within the estate would be of interest to different segments of the market, the court determined that there would not be one buyer, like the estate’s proposed single bulk purchaser, but several buyers with multiple sales transpiring over a period of time. The court proposed that O’Keeffe’s work should be divided into two categories for these potential sales: works salable within a relatively short period at approximately their individual values; and works that could be marketed over a longer period of several years. The quality, uniqueness, and salability of each respective work would determine placement in a particular category. The court further proposed that the latter group should be discounted at seventy-five percent, and the former group should be discounted at twenty-five percent. According to the court, the fair market value of the entire estate–with the discount–was $36,400,000, leaving the IRS to determine the final tax liability for the estate.

Calder v. Commissioner of Internal Revenue

Unlike the Smith and O’Keeffe cases, the case Calder v. Commissioner of Internal Revenue addressed the blockage discount issue in the context of gift taxes. The federal gift tax is a tax imposed on an annual basis on all gratuitous transfers of property. Gift taxes are typically associated with estate taxes, since both share the same rate structure and certain credits. Thus, it is appropriate and illustrative to discuss the Calder case in the context of blockage discounts applied to estates.

The petitioner in this case is the widow of Alexander Calder (1898-1976), the American artist known for large abstract sculpture. Alexander Calder died in 1976, and his widow, Louisa Calder, inherited from the estate 1,226 gouaches. The 1,226 gouaches were listed as part of a collection of 1,292 gouaches on the estate tax return filed by the Calder estate. The total fair market value of the 1,292 gouaches listed on the tax return was $949,750, which accounted for a blockage discount of sixty percent. The IRS did not dispute this value at the time the estate tax return was filed. After the death of Alexander Calder, his widow created four irrevocable trusts for her children and grandchildren (six beneficiaries in total: two daughters, four grandchildren). Louisa Calder then gifted the gouaches to the trusts: 306 gouaches to each of the trusts of the daughters and 307 gouaches to each of the trusts of the grandchildren. 369 of the gouaches were sold between 1977 and 1984 on behalf of the trusts.

On her 1976 gift tax return, Louisa Calder estimated that the fair market value of the gouaches did not vary between the date of death and the date of the gift and applied the same sixty percent blockage discount on the gift tax return, reporting a value of $949,750. The IRS calculated the value of the gifts to be $2,300,000, opposing the application of the blockage discount for the gift tax. According to the IRS, blockage discounts were inappropriate in this context, because gifts, unlike deaths, are contemplated events and can accommodate the market accordingly. Louisa Calder petitioned the Tax Court for review.

While Louisa Calder, the IRS, and the Tax Court agreed on the fair market value of the individual gouaches, the legal issue before the Tax Court in Calder v. Commissioner of Internal Revenue was whether a blockage discount should be applied when valuing gifts, and if so, whether the discount should be applied to each gift separately or applied on an aggregate basis to all the gifts as a block. The Tax Court ultimately held that blockage discounts may apply to gifts, and that the blockage discount should be applied separately to each gift that Calder made to the beneficiaries, citing the Treasury regulations that outline the same treatment for the valuation of a block of stocks distributed as multiple, separate gifts.

To determine the precise discount, the court used the same approach for valuing annuities by considering the rate of liquidation at a uniform rate over a period of time. Relying on the actual average sales figures of the gouaches already sold during the 1977-1984 period, the court found that sixty gouaches could be sold each year, and that it would take twenty-two years to liquidate all 1,226 gouaches. Using an annuity framework, the court applied a ten percent discount rate over the twenty-two-year liquidation period to the per-item fair market value of the gouaches, resulting in a total valuation of $1,210,000. The Tax Court then handed over the final tax liability calculation to IRS with this relatively minor adjustment in value.

Block Discounts for the de Kooning Estate?

Determining the fair market value for a single painting can require a complicated investigation into the art market and the work itself. Calculating the value of a collection of tens or hundreds of similar pieces only further complicates the analysis. While the estate tax regulations do not explicitly provide a framework for valuing a block of artwork, the Tax Court has applied the principles outlined in the regulation for valuing securities (26 C.F.R. § 20.2031-2) to the estates and gifts of artists. This case history, as exemplified by the Estate of David Smith, Estate of Georgia O’Keeffe, and Calder, reveals multiple factors that a court may consider when calculating a blockage discount including the potential buyer, the salability of the type of works, the artist’s reputation, and the potential rate of sale. The evolution of the blockage discount for art–from the earliest application in the Estate of David Smith to the later Estate of Georgia O’Keeffe and Calder cases–reveals an increasing emphasis on the sale of the block of artwork over a period of time. To make such a calculation, the Tax Court and practitioners must continue to rely on securities regulations and valuation practices, demanding specialized knowledge and resources from the estates of artists.

No precise calculation exists in this extremely fact-based analysis. Further case law to provide insight in the reasoning of the Tax Court would be helpful to both tax practitioners and estate executors. The ongoing case about the de Kooning estate presents slightly different facts from the Estate of David Smith and Estate of Georgia O’Keeffe cases, as it is not the estate of the artist at issue but that of the artist’s daughter. The Tax Court’s opinion will hopefully address whether this fact is of material significance, and clarify current law regarding the application of blockage discounts to art held by an estate. The case, Estate of de Kooning v. Commissioner of Internal Revenue, is still pending before the U.S. Tax Court as of the date of this article.

Select Sources:

     Estate of de Kooning et al. v. Commissioner of Internal Revenue, 4860-17.
     Estate of David Smith v. Commissioner of Internal Revenue, 57 T.C. 650 (1972).
     Estate of Georgia O’Keeffe v. Commissioner of Internal Revenue, 63 T.C.M. (CCH) 2699 (1992).
     Calder v. Commissioner of Internal Revenue, 85 T.C. 713 (1985).
     Treas. Regs. (26 C.F.R.) § 20.2031-1.
     Treas. Regs. (26 C.F.R.) § 20.2031-2.
     Treas. Regs. (26 C.F.R.) § 25.2512-2.
     Treas. Regs. (26 C.F.R.) § 25.2512-5.
     Jimmy Hoover, De Kooning Estate Battles $92M Tax Bill Over His Artwork, LAW360 (Mar. 6, 2017, 8:52 PM), https://www.law360.com/articles/898666.
     John G. Steinkamp, Fair Market Value, Blockage, and the Valuation of Art, 71 Denv. U. L. Rev. 335 (1994).

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More Troubles at Mossgreens

About a month ago I posted on the closing of Australian auction house Mossgreen (click HERE to read for background). The Antiques Trade Gazette has  recently posted a story that the bankruptcy administrators, firm BDO, is trying to gain approval from the court to charge consignors where lots were bought-in or not yet offered for sale a fee of nearly $350 to pick up their property. I guess some good news is at least the objects were not sold and monies kept by Mossgreen or the administrators to pay debts.

BDO is claiming the system for connecting objects to consignors is dated, and not reliable, and therefore needs to charge the additional fees. You gotta love these attorneys. A judge is to decide if the fee is appropriate or not.

The ATG reports

A court hearing in Sydney has now been set for next week where BDO Australia will seek formal approval of their charges of $353.20 (around £200) per lot for vendors to collect their own goods.

The hearing will take place before or soon after March 29. Consignors of items that were either unsold or awaiting sale at the time the firm folded in December have been given short notice to arrange their arguments and evidence. They have until 5pm on March 27 to lodge their objections and any documents with the court.

ATG understands that many consignors have engaged lawyers to represent them but individuals can also attend the hearing and give their arguments in person.

BDO’s filed submission ahead of the hearing states that “the process of undertaking the stocktake has been time consuming and costly”.

The presiding judge at the Federal Court in Sydney is Justice Gleeson and the reference for the proceedings is NSD318/2018.

Court venue
It was originally thought that the case would be heard in Melbourne where Mossgreen’s headquarters and the majority of consignors are located. However, BDO applied earlier this month to have the hearing at the Federal Court in Sydney instead.

BDO had given consignors a four-week period from February 12 to pay the fees and collect or the “goods may be deemed abandoned and may be dealt with as such”. In a large number of cases, the fees being charged far exceed the value of the goods concerned.

Many vendors reacted angrily at the imposition of the fees, while BDO argued that the charges are “to meet the reasonable and properly incurred costs of identifying, preserving, maintaining and facilitating the return of the consigned goods”.

In BDO’s filed submission, the administrators point to the complexity of dealing with the stock and “inadequate labelling” of the items in the company’s possession”.

“The company’s stock management systems were not up to date and could not be relied on to determine stock holdings… There were also lots not recorded in those systems.”

Both consigners and sources with knowledge of Mossgreen operations have told ATG that they dispute this assertion, saying that the company’s records and labelling were actually in good order.

The situation in Australia has been markedly different to the way the administration of Mossgreen-Webb’s in New Zealand has been handled. In this case BDO advised consignors to collect their property with no fees charged, and the assets of the business have now been sold to new owners.

Source: Antiques Trade Gazettee 

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Difficulties of Middle Market Art Dealers

The NY Times has an interesting article about the struggles of the middle market, galleries focused on emerging artists and the smaller art galleries. The article states fewer collectors are visiting smaller galleries and with that many are struggling to survive or are closing.

The NY Times reports

“We sat down with five or six other little galleries and went to the pub and asked, ‘How’s it going?’ ” said Tot Taylor, co-founder of the contemporary art dealership Riflemaker, recalling a meeting he had in 2012 with a group of fellow London gallerists. “Everyone said, ‘Not very good.’ ”

Mr. Taylor said he had then asked his colleagues if there was one big thing that had changed. All of them replied that fewer people were visiting their galleries. Why? “We just don’t know,” they said.

Five years later, in September 2017, Mr. Taylor’s gallery, situated in a 19th-century gun maker’s shop in the Soho district of London, joined the art world’s ever-lengthening list of small and midsize dealerships that have closed.

Founded in 2004, Riflemaker was one of a crop of London galleries that sprang up when the generation that became known as the Young British Artists, or Y.B.A.s, was in vogue. The Soho gallery’s entire inaugural exhibition, devoted to more than 450 drawings by the imaginary artist “Naomi V. Jelish” (an anagram of Jamie Shovlin, who made the works), was bought by the British collector Charles Saatchi for 25,000 pounds, about $45,000 at the time.

As Mr. Taylor recalled: “It was fashionable to buy works by people no one had ever heard of. Everyone was at it. A collector who’d buy a Damien Hirst butterfly painting for a million would still buy a little painting for three thousand.”

But then, he said, “It stopped.”

The former gallery space is now occupied by a branch of an upmarket Parisian fashion store. Mr. Taylor plans to open a new gallery in the King’s Cross district of London in October next year.

Gallery openings and closings have always been a feature of the art world, but recently, closings have predominated. The annual report on the art market published this month by Art Basel and UBS said that in 2017, for the first time in 10 years, closings of galleries outnumbered openings.

Carroll/Fletcher, Ibid, Limoncello, Vilma Gold, White Rainbow and Wilkinson were among the contemporary dealerships in London to fold spaces last year.

Why are galleries that incubate emerging talent finding it so difficult to survive? Is it simply the pressure of rising rents in expensive cities like London and New York? Or is there a wider problem?

“The collectors aren’t going to galleries any more, they’re going to art fairs,” said John Martin, a dealer in contemporary art who has a gallery in the Mayfair district of London. “They’re less intimidating, more social, more convenient, and they’re open in the evenings and at the weekend,” he added. “People are time-poor.”

The Art Basel and UBS report estimated that more than $15 billion of sales were made at art fairs in 2017, representing about 46 percent of total dealer transactions. International collectors flock to destination events such as the three Art Basel fairs and the two (soon to be three) Friezes, where the booths of mega-galleries like Gagosian, Hauser & Wirth, Pace and David Zwirner occupy the prime positions.

“Smaller dealers can’t compete with the big galleries in a fair environment,” said Mr. Martin, who pointed out that the prices for emerging artists were often too modest to recoup the expense of participating. “We can be facing costs of up to $80,000,” he added. As well as being a gallerist, Mr. Martin is the co-founder of Cromwell Place, a project to develop a complex of rentable art spaces in the South Kensington district of London.

But there are other forces at play. According to the latest Art Basel and UBS report, galleries with annual sales below $500,000 experienced a decline in turnover, while those with sales above $50 million registered growth. At the same time, the wealth of the world’s millionaires and billionaires rose to just under $129 trillion. In other words, the rich are getting richer — and they’re making bigger purchases at the top galleries.

That was plain to see by the art and the price points at the grander gallery shows held to coincide with this month’s contemporary art auctions in London. Gagosian’s main gallery in Mayfair, for example, was showing “Come to Dust,” a museum-like exhibition of 60 recent paintings, drawings and sculptures by the British artist Glenn Brown. Many of these technically dazzling reinterpretations of old masters were presented in elaborate antique frames. They were priced at $120,000 to $4.5 million, according to Magnus, an app that makes gallery prices available. Hauser & Wirth was showing “Unanswerable,” its first exhibition of works by the critically admired American multimedia artist Lorna Simpson. Prices there were $150,000 to $450,000, according to the gallery.

Both artists are, in their different ways, established figures. Both shows were dominated by big, substantially priced paintings and sculptures that would impress in a public or private museum. Even smaller “entry-level” purchases were tagged at more than $100,000.

“The art system needs renewal,” said José Freire, founder of Team Gallery, a contemporary dealership with spaces in Los Angeles and New York. “There’s a danger of it becoming codified, and if it becomes codified, it squashes the idea of the avant-garde,” he added.

Mr. Freire has announced that he is giving up fairs, having exhibited at 78 over the last 17 years or so. His final participation will be at Art Basel Hong Kong, which opens with previews on March 27.

“I don’t understand why the internet hasn’t killed the art fairs,” said Mr. Freire. “I don’t need to go to an art fair to see it. I can stay where I am.”

In reality, the internet has done more to kill smaller art dealerships, given that anyone can see an exhibition on a smartphone without having to visit a gallery. But Mr. Freire, like pretty much every other dealer in the contemporary art world, still cleaves to the idea of having some kind of physical space in which to present a work. And Mr. Freire will only sell to collectors who turn up to his shows.

Mr. Freire said he had a waiting list of over 100 would-be buyers for “Daisy Chain,” his recent sellout exhibition of nine small figurative paintings by the New York-based artist Sam McKinniss at Team’s intimate, cost-effective space in a bungalow in Venice, Calif. Priced at $12,000 to $18,000, the works feature edgy portraits of California-linked celebrities as diverse as Joan Didion and Whitney Houston.

On March 1, three days before “Daisy Chain” closed, Damien Hirst’s “Veil Paintings” also sold out — albeit at a rather different price level — nine miles away at Gagosian in Beverly Hills. Hailed as the latest stage in the comeback of perhaps the world’s most famous (if, now, not so young) Y.B.A., those huge abstracts were painted by Mr. Hirst in a neo-pointillist style evoking the art of Georges Seurat and Pierre Bonnard. They were snapped up by collectors for $400,000 to $1.6 million, according to Artsy, an information and advertising website for the art world.

Mr. Freire, who has his California bungalow, and Mr. Martin, with his Cromwell Place project, are trying to come up with imaginative survival strategies for lower-tier dealers. But ultimately, for that to happen, more collectors are going to have to rediscover that smaller art in smaller galleries at smaller prices can be beautiful, too. If they do not, the art world faces a serious problem.

Source: The NY Times 

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A Look at The European Fine Art Fair

The NY Times recently published an interesting article on TEFAF . The article notes changing collector tastes away from Old Master works as well as dwindling supply of quality works. That said, TEFAF has signed up for another 10 years, and the promoters have opened new shows to attack new collectors.

The NY Times reports

MAASTRICHT, the Netherlands — Works made within the past 100 years are dominating the art market.

Contemporary and modern pieces accounted for 73 percent of the value of all fine art auction sales in 2017, according to the second annual Art Basel and UBS Global Art Market Report, which was published Tuesday. European old masters generated just 7 percent of last year’s sales, even factoring in Leonardo da Vinci’s $450.3 million “Salvator Mundi.” The report said that Leonardo price “should be considered an outlier variable.”

European old master pictures, and the works of art and decorative objects associated with them, were once the most prestigious status symbols that money could buy, but they are no longer the height of collecting fashion. Dealers specializing in these objects now look to sell their best pieces either to museums or to a relatively small pool of wealthy connoisseurs.

The European Fine Art Fair in Maastricht, whose 31st edition opened March 8, is the one event in the art world calendar where specialist dealers show a critical mass of museum-worthy art of the past. Last year’s event attracted more than 71,000 visitors over 10 days.

“There are so many dealers in one place. In terms of the decorative arts, there’s nothing comparable,” said Gloria Groom, chairwoman of European painting and sculpture at the Art Institute of Chicago. She said she was one of six members of the museum’s staff visiting the fair, which this year featured 275 exhibitors.

Such is the quantity and quality of the pieces on show in Maastricht that curators — and, equally important, groups of private patrons — from institutions such as the Art Institute of Chicago; the Metropolitan Museum of Art in New York; the Museum of Fine Arts, Boston; and the J. Paul Getty Museum in Los Angeles make the pilgrimage from the United States every year.

But this year, the Rijksmuseum in Amsterdam beat the Americans to a star museum piece. The London dealer Benjamin Proust was offering on consignment the original wax model for “The Genius of the Medici,” a bronze fountain sculpture now in the Palazzo Pitti in Florence, Italy. Dating from the 1550s, the statue, showing a young boy seated on a pedestal and raising an orb, was identified as a work by the Florentine sculptor Bartolomeo Ammannati. The wax model, owned by a private European collector, was included in an exhibition on Ammannati at the Bargello museum in Florence in 2011.

Frits Scholten, senior curator of sculpture at the Rijksmuseum, spotted the sculpture. He was given first refusal at a museum discount price of 700,000 euros, or about $866,000, and fast-tracked the Dutch institution’s purchase, according to Mr. Proust.

Mr. Proust said he had deliberately avoided marketing his star piece before the fair opened. “Everyone should be surprised,” he said. “If I send out stuff before the fair, why should they come?”

Who does and doesn’t come to Tefaf is an ongoing concern for its exhibitors and organizers. In an attempt to widen the fair’s international appeal — and to reach out to American collectors reluctant to travel to Europe after the terrorist attacks in Paris and Brussels — Tefaf collaborated with the art investment advisory firm Artvest Partners to start fall and spring fairs in New York in November 2016 and May 2017.

Under the aegis of Christophe van de Weghe, the new chairman of the fair’s Modern section, Tefaf’s spring edition, scheduled for May 4-8, will feature powerhouse galleries who currently do not exhibit in Maastricht — including Gagosian, Hauser & Wirth and David Zwirner.

But has this diluted the appeal of the mother fair in the Netherlands?

“There could be a handful of people who won’t come to Maastricht because of Tefaf New York. But it will increase awareness of the brand,” said Howard Shaw, president and director of Hammer Galleries, a New York dealership that exhibits at both Tefaf Maastricht and New York Spring. “I can’t tell you how many of my clients haven’t heard of this fair.”

In Maastricht, Mr. Shaw sold the small but vibrant Vincent van Gogh canvas “Lilacs,” painted in Paris in 1887, priced at $9.5 million. It had been owned by the foundation of the gallery’s creator, Armand Hammer, since 1971.

Though the arrival of leading international galleries such Perrotin, Massimo de Carlo and Mazzoleni gave an extra edge of quality to Tefaf Maastricht’s Modern section, most of the truly exceptional objects and sales remained concentrated in the booths devoted to older artworks.

“There’s a freshness about the fair this year,” said Ms. Groom of the Chicago Institute of Art. “There are more revelations.”

The top-of-the-range Paris dealers Kugel Gallery sold an opulent ivory and silver gilt astronomical clock, made in the 1630s by the Augsburg goldsmiths David I. Schwestermuller and Daniel Zech. The price of the so-called Bulgari Clock was a closely guarded secret. Also kept quiet was the price of a newly discovered half-length canvas of St. Stephen from the 1640s by the Neapolitan baroque painter Bernardo Cavallino, which sold before the fair opened by the Rome dealership Giacometti Old Master Paintings. Retaining its original frame, and fresh from a private Italian collection, this was regarded by many as the outstanding old master of the fair. It was bought by an American private collector.

Among the confirmed sales, the London dealers Agnews found a private European buyer for “The Serenade, or The Ambulant Musicians,” a multi-figure composition by Jacob Jordaens that was once owned by Empress Joséphine, Napoleon’s first wife.

Painted around 1640-5, this was another recent rediscovery and was priced at $5 million. It was first offered, however, at Tefaf New York last fall.

Tefaf has signed up for a further 10 years in Maastricht. The agreement has followed assurances from the local authorities that the fair’s tired 1980s venue, the MECC Maastricht, will be revamped, luxury hotel rooms created and travel links improved.

But will demand for the fair’s traditional “destination” strength of old master art and objects be set for an upgrade, too — particularly if collectors tire of today’s increasingly formulaic contemporary market?

Clare McAndrew, who from 2008 to 2016 wrote much-referenced art market reports for Tefaf and now does it for Art Basel and UBS, is not so sure.

“Old masters could become more popular again, but it’s doubtful if it could swing back in a big way,” Ms. McAndrew said. “The supply is so thin.”

Unlike today’s counterparts, Ammannati and Cavallino didn’t make art in editions of six.

Source: The NY Times

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Art Basel Art Market Report - Dealers

I posted a couple of days ago on the Art Basel and UBS Global Art Market report for 2018. The Art Newspaper has a good summary on the dealer side of the report, showing the rise of art fairs, and dealer concerns on the high cost of participating in them. The report concludes, and not without controversy that 55% of the $63.7 billion art market is through private sales.

Again, I encourage appraisers to download and review the data, some of it is great, some can be criticized, but all is very interesting giving some excellent insight into the art market.

The Art Newspaper reports

How to measure the size of the art market has long posed a thorny topic, as evidenced last year by two reports published by two art fairs that gave very different answers.

This year, The European Fine Art Fair (Tefaf) has withdrawn its survey, leaving Art Basel’s Clare McAndrew to come up with the definitive answer–an almost impossible task in the notoriously opaque art market. As Art Basel’s director Marc Spiegler notes in the forward to the Art Basel and UBS Global Art Market report: “true transparency is inherently unattainable”.

Potential pitfalls aside, McAndrew’s findings, published yesterday, show the art market grew 12% to $63.7bn in 2017 after two years in decline. These gains were driven by the sale of a handful of trophy artists at the top end of the market, led by Leonardo da Vinci’s Salvator Mundi, which sold for $450m at Christie’s in November.

At auction, growth only occurred for works that sold for over $1m. Works sold at this level accounted for 64% of sales, while representing just 1% of transactions. Meanwhile, dealers with annual turnover above $50m saw 10% growth, but gallerists with turnover below $500,000 saw revenues fall by 4%.

“The market has become increasingly polarised, particularly since 2009, which parallels what is happening in the world,” McAndrew says. “It’s not just about the high end dealers doing well; a lot of galleries are complaining that they are encroaching more and more on their space and taking their artists.”

Remedies include more rigorous contracts between artists and galleries, “vertical collaborations” between galleries of different sizes and cross-sector projects that don’t segregate, for example, auction houses and dealers.

McAndrew also points to the online sector as a possible antidote. Here sales grew 10%, driven by second-tier auction houses with revenues below $250,000. She acknowledges that online art sales have lagged behind other industries, with dealers reporting a drop of 2%, but says the online sector has the potential to offer “access to new buyers at different levels–those who aren’t part of the 1% of high net worth collectors”.

McAndrew estimates the online market to be worth $5.4 billion, an unqualified figure according to the Belgian collector and art market commentator Alain Servais. “Are sales to buyers bidding online rather than on the phone in a live auction included in online sales? Are sales made by galleries via email included in online sales? What is or is not included?,” he asks.

A new chapter on art fairs and exhibitions reflects one of the seismic shifts in the art market in recent years. “The rise of art fairs and the evolution of the event-driven market has been the most significant trend for dealers in the last two decades,” McAndrew writes. Last year, $15.5 billion-worth of art was sold at art fairs, up 17% year-on-year, according to the report.

But dealers also reported the cost of art fairs to be prohibitive, likening their expenses and revenues from fairs as being equivalent to running another gallery in terms of magnitude. Meanwhile, gallery sales have been in “steady decline” compared with art fair and online transactions over the past 20 years, the report notes.

Between 2007 and 2017 there has been an 87% drop in the number of galleries opening. “The closure of galleries in recent years is often a pragmatic choice by dealers in the face of diminishing returns, with some noting this year that ‘the numbers just didn’t add up’,” McAndrew says.

Unverifiable gallery sales, which account for 53% on the overall market, pose the biggest problem for the report, says the art market entrepreneur Magnus Resch. “The report lacks a sound methodology. Dealer sales of $33.7bn are nothing more than a wild guess, certainly not scientifically proven,” he says.

McAndrew relies on a survey sent to around 6,500 dealers, which had a 14% response rate, down from 17% last year. The figure is still “average for an online survey”, McAndrew stresses.

Tom Mayou, the director of operations at the London art advisory, Beaumont Nathan, says McAndrew’s findings in the private market “ring true”, but advises readers to take specific conclusions “with a pinch of salt”.

“What we are seeing is that there is not one art market but two,” Mayou says. “There’s the very very top and then there’s the rest. Whether you are a gallerist, an artist or a collector, it pays to be on top.”

Source: The Art Newspaper 

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The Art Basel and UBS Global Art Market Report 2018

Art Basel and UBS Global Art Market Report for 2018 has recently been released. Follow the source link below to download the full report. It is free, you just need to submit your email address.

According to the report the global market was up 12% to an estimated $63.7 billion after two years of decline. The US remains the largest art market by far with 42% of the activity, followed by China at 21% and the UK at 20%. Online sales have reached $5.4 billion in 2017 and have increased by 72% over the past five years.

Dealer sales are strong, but much of the strength come from dealers selling at art fairs. I am still reading the full Art Market Report 2018 which is 175 pages in length and contains some great analysis \, graphs, charts and statistics for appraisers for use in preparing market reports and when discussing the overall health of the art market with clients. I recommend all AW readers download the report and read.

The Art Basel UBS press release and summary states

The Art Basel and UBS Global Art Market Report: Return to growth for global art market, with China overtaking the UK

• Global art market up 12% to an estimated $63.7 billion, after two years of decline

• China narrowly overtakes the United Kingdom as second largest market; US retains position as the largest market, and regains ground with an increase in sales of 16% year-on-year

• UBS research collaboration reveals fresh insights on collecting behaviors of US-based high net worth individuals

Zurich/Basel, 13 March 2018 – UBS and Art Basel today published the Art Basel and UBS Global Art Market Report, authored by renowned cultural economist Dr Clare McAndrew, and integrating strands of research from UBS and its Chief Investment Office. A comprehensive and macro-level analysis of today's international art market, the report covers key trends in the market in the context of wider economic shifts.

Key findings:
• Global Sales: The art market achieved total sales of an estimated $63.7 billion in 2017, an increase of 12% on 2016. Much of the uplift in sales in the auction and dealer sectors was at the top end of the market, capped by record prices in the auction sector, including the high-profile sale of the Leonardo da Vinci painting 'Salvator Mundi' for $450 million at Christie’s.

• Leading Markets: The US was the largest market worldwide, accounting for 42% of sales by value, with China in second place 21% and the UK the third largest market with 20%. 72% of dealer sales in the US were to local buyers.

• Asia's Growth: The Asian market accounted for 23% of global sales in 2017, and Asian buyers accounted for 15% of dealer sales globally, with Chinese buyers representing the majority at 10%, up significantly from just 4% in 2016, reinforcing evidence of the continued growth of Asian buying power.

• Auction figures: Sales at public auction of fine and decorative art and antiques reached $28.5 billion in 2017, up 27%, and giving total auction sales a 47% share of the market. The biggest increases were at the very highest end, with the total value of works sold for over $10 million increasing by 148% over 10 years, and by 125% year-on-year in 2017.

• Dealer Figures: Dealer sales increased 4% year-on-year to an estimated $33.7 billion, representing a 53% share of the market. The most growth in sales year-on-year was in the segment above $50 million. Some US dealers reported additional activity at the end of the year, driven by the Trump administration’s tax reform and the cessation of the availability of 1031 Like-Kind Exchanges for art.

• Art Fairs: Art fairs continue to be a central part of the global art market, accounting for an estimated 46% of dealer sales in 2017 and aggregate sales were estimated to reach $15.5 billion in 2017.
• Online Sales: The online art market increased substantially in size over the last five years by 72%, reaching an estimated $5.4 billion in 2017.

The report draws on two key strands of research by UBS and its Chief Investment Office:
• A survey on the collecting behaviors of US-based high net worth individuals undertaken in collaboration with Clare McAndrew and her team, as part of UBS quarterly Investor Watch, revealed that 35%, an estimated 1 million HNWIs, were active in the art and collectibles markets. 93% of those surveyed reported that they most often bought at prices less than $50,000 and 43% reported that buying through a gallery directly or at an art fair was their preferred channel. 73% felt that a passion for collecting art was an expression of their personality, while 63% were motivated to support arts and culture, with a higher rating for women (71%) than men (59%). There was a particularly strong motivation to support local and national artists and living artists. 86% of collectors surveyed reported that they had never sold a work from their collection, and while 73% of those surveyed had a professional financial advisor, relatively few used an art advisor (8%).

• The UBS/PwC Billionaires Report 2017 which illustrates a growth in the engagement in art by billionaires, as evidenced by greater representation on media lists of top collectors globally, the growth in private museums especially in Asia, and the increase in private funding to public museums. Asian billionaires now outnumber their US counterparts and Asian billionaire wealth will potentially exceed that of the US in as soon as four years.

Paul Donovan, Chief Economist, Global Wealth Management, UBS said: "Art can provide insight into our complex and unpredictable world and challenge established ways of thinking. The performance of today's growing and globalized art market is a fascinating reflection of wider economic trends and highly correlated with GDP and HNW populations. Collecting is a passion that we share with many of our clients and alongside our own exclusive art services, this collaboration with Dr Clare McAndrew and Art Basel is a natural fit for our ongoing commitment to the research and analysis of markets and economic data for our clients."

Clare McAndrew, Founder, Arts Economics said: "After two years of uncertainty and decline, the market turned a corner in 2017 with growth in the auction and dealer sectors, as well as at art fairs and online. Despite some remaining political volatility, robust growth in high-end global wealth, accelerating financial market returns, stronger consumer confidence and increased supply led to a much more favorable environment for sales. However, these industry-wide gains were driven by sales at the top end of the market. Away from this premium segment, performance was not all positive, with many businesses coming under pressure. This divergence in performance is a continuing concern, particularly as the majority of employment and ancillary spending comes from the very many other businesses in the art trade below the top tier. To maximize its economic impact, the market needs to be functioning well at all levels."

Noah Horowitz, Director Americas, Art Basel said: "This report provides an unparalleled overview and analysis of the current state of the market. While the strong gains realized in 2017 as well as the field’s ever more global infrastructure are certainly reassuring, its top-heavy nature and rapidly changing dynamics, as captured in this report, have also never been clearer. Dr Clare McAndrew's findings are a must-read for any serious market participant or commentator, offering fresh insight on a wide range of the most pressing issues in today’s art business."

Source: UBS Contemporary Art 

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Artist-Museum Partnership Act

Interesting article from the Observer on the origin of closing of the loop hole allowing artists and creators to take a fair market value tax deduction on donated works and archives.  According to the observer it was Richard Nixon in 1969 taking a $576,000 deduction for the donation of his papers as the Vice President under Dwight Eisenhower.

Every year since 1970 there have been bills to allow artists to again take the FMV deduction, but so far without any serious consideration or hopes of votes and passage.

The Observer reports

People do lots of things with no expectation of a financial benefit. Some don’t have any associated cost—”let me hold the door for you,” or “I’ll watch your kids so you can go out for the evening”—and some do, such as pro bono legal work or Doctors without Borders. There are no billable hours for being a mensch. Fine artists often are good guys, regularly donating their work to help fund initiatives or institutions. Like the charity auction being held in May to raise money for the construction of a new home for the Studio Museum in Harlem. Mark Bradford, Sam Gilliam, Rashid Johnson, Glenn Ligon, Julie Mehretu and Lorna Simpson are among the artists who have donated their own artwork to help the 50 year-old museum find the $175 million it needs.

What will these artists receive for their donations? A thank you, a handshake, an invitation to an opening night gala, but no tax deduction—which means that they might only be able to write off $10 for the gift of a $10 million painting—while a collector of their artwork could deduct the full fair market value of the artwork on his or her tax returns.

Many artists and museum directors believe that to be an inequity for which one can blame President Richard M. Nixon.

Back in 1969, the newly inaugurated president filed tax returns claiming a charitable deduction of $576,000 for the donation of his vice-presidential papers during the Eisenhower Administration, dropping his taxable income to zero. (It should be pointed out that American presidents, dating back to Harry Truman, received sizeable tax benefits when donating their presidential papers, but it was the outsized claims of President Nixon that compelled Congress to act, closing a tax loophole that allowed notable figures from donating the work of their own hands for unsubstantiated values at the expense of the American people.) The effect of the subsequent Tax Reform Act of 1969 on artists was incidental and not the immediate target of Congress, but it has been artists, writers and composers who have found the change in the law most irksome.

As a result, in every Congress since 1970, there has been a bill to allow artists once again to take a full fair market value deduction on their tax returns for their gifts. Vermont Senator Patrick Leahy’s “Artist-Museum Partnership Act” is the current initiative in this area.

Museum directors have complained that the disincentive has made artists unwilling to donate their work, which has deprived the public of access to contemporary art, but neither of those claims are quite true. Artists do donate their work to public institutions, perhaps not at the clip that some museum curators and directors might like, but artists are keen to get their work into permanent collections, and the dealers for many top artists frequently require buyers to pledge in binding contracts that they will gift what they have purchased to museums rather than sell them.

Indian-born American artist Zarina donated two of her woodcut prints—Dividing Line and Remains of the City, both 16 by 12 inches and both produced in 2001—to the Whitney Museum of American Art in 2014. They were among the 23 artworks gifted to the museum that year by the artists who had created them, and as Zarina explained, there are still other motivations to give one’s own work. “I made the donation to Whitney because they had already bought my work and they had shown an interest in acquiring more. Sometimes making a donation doesn’t benefit an artist financially, but it benefits them in other important ways. I have lived in New York City for the past 40 years and it is an honor just to be accepted into the permanent collections of these institutions.”

Additionally, museums have not suffered from a lack of donations of artworks by living, contemporary artists—large and small institutions receive gifts of these artworks in large numbers every year—but the donors are overwhelmingly collectors. Back in 1970, when the 1969 tax law went into effect, museums such as the Museum of Modern Art, the Art Institute of Chicago and the Metropolitan Museum of Art were not particularly active in building their contemporary art holdings, but these days there is no area of acquisitions that is greater. To many economists, changing the tax law to advantage artists because of a problem that does not exist is unwise public policy.

Leonard Burman, senior fellow and director of the Tax Policy Center of the Urban Institute, opposes reversing the 1969 law, claiming that “deducting actual costs make sense and is exactly the right tax treatment, because you shouldn’t be able to deduct income you’ve never earned. That would end up giving artists a double deduction.” He added that changing the law as Senator Leahy proposes “helps wealthy artists, but wouldn’t do anything for the starving artist.”

Burman added that a better way to support the arts and art institutions is not through tax policy but with spending programs, such as increasing the budget of the National Endowment for the Arts.

Still, the artists who are donating their work on behalf of the Studio Museum are not getting these pieces directly into a museum collection, and they certainly receive no tax benefit for their generosity, so why are they doing it? None of those artists responded to an inquiry, but others have.

“I am a nice person,” said Los Angeles mixed-media artist Laddie John Dill, who has donated works to a variety of charities and nonprofits for their fundraisers, including one in 2017 for the Laguna Art Museum, which held a benefit auction to which he contributed a $40,000 metal and glass work, Light Sentence Warm to Cool (2014). “Regarding tax, I’m so used to that abusive tax law that I just roll with it,” Dill said.

Being nice and ignoring what is irksome are good reasons to do many things, and another contributor to that Laguna Art Museum fundraiser, Irvine, California stone carver Marton Varo claimed that “I always believe in helping good causes, health care, education and arts.”

Tax considerations also play little to no role in Richard Serra’s practice of donating his own work to museums and other nonprofit arts institutions, according to Trina McKeever, the artist’s studio manager. “Richard gives work away all the time,” and two recent instances—a large-scale sculpture and an abstract painting on paper—were 2013 gifts to the Museum of Modern Art. “He is in a place where he certainly can afford to donate work when he wants to.”

Another artist who can afford to donate, and not just sell, her work, Cindy Sherman, similarly has donated photographs widely, including to the 2013 Aid for AIDS auction and in 2015 to the Foundation for Art and Preservation in Embassies, which installs artwork in U.S. embassies around the world. She said, “my reasons have really been out of a sense of giving back, particularly helping organizations that help the arts and especially younger or unestablished artists or organizations, or just places that are doing amazing things and need the support. Sometimes, I’m friends with the organizers. Occasionally, it’s an artist who’s asking other artists to donate, and once it was a sort of ‘I’ll donate to yours if you donate to mine.’”

Zarina noted that “I sometimes donate my work to charitable causes, such as charity auctions or special projects, and am happy to not accept any benefit from it. Some of them offer to reimburse me for my expenses but in the culture I come from there is the saying, ‘what your right hand gives in charity, the left hand should not know.’ It does feel good to give back sometimes.”

Giving back feels good and may also make the recipient institution feel good about the donating artist, which can pay off when exhibitions are being planned. It is difficult to put a dollar value on good will. In early 2015, 41 artists—including John Baldessari, Barbara Kruger, Mark Bradford, Ed Ruscha and Takashi Murakami—donated one artwork apiece for an auction benefiting the Museum of Contemporary Art in Los Angeles. The highlight of the auction, which was conducted by Sotheby’s, was an untitled 2011 oil on cardboard painting by Mark Grotjahn that sold for $6,522,000, well above its $2-3 million estimate. In all, the benefit raised $22.5 million for the museum.

Source: Observer

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The Art Economy

I got back from the ISA Conference and Pasadena late Thursday evening. An uneventful, but long trip, but I have no complaints. The ISA conference was excellent and by all accounts a great success with positive feedback on the location, hotel, presentations, tours, classes and special events. Congratulations to Perri Guthrie, ISA President, the ISA Board of Directors, the conference planning committee and staff for hosting and managing another in a long line of excellent and industry leading programs and conferences.

Back to our regular posts.

Fellow appraiser Claudia Hess sent me a very interesting article from Artsy on the art economy (for 2015), which totals $763.6 billion and is larger than transportation and agriculture based upon data recently released by the Bureau of Economic Analysis (BEA) and the National Endowment for the Arts (NEA). The study states "The arts employ 4.9 million workers across the country with earnings of more than $370 billion. Furthermore, the arts exported $20 billion more than imported, providing a positive trade balance. Click HERE for more info on the NEA and BEA report.

Artsy reports on the NEA and BEA data

jThe arts and cultural sector contributed over $763.6 billion to the American economy in 2015—more than the agriculture, transportation, or warehousing sectors, according to new U.S. government data released Tuesday by the Bureau of Economic Analysis (BEA) and the National Endowment for the Arts (NEA).

The arts generated 4.2% of the overall U.S. GDP, with roughly 4.9 million Americans working in the sector in 2015, the latest year for which data is available. Collectively, those employed in the sector earned over $370 billion, according to the findings.

The sector expanded by an average of 2.6% annually between 2012 and 2015, just outpacing the 2.4% growth of the economy overall, according to the report. Between 2014 and 2015, the sector grew at a rate of 4.9% after adjusting for inflation.

“The data confirm that the arts play a meaningful role in our daily lives, including through the jobs we have, the products we purchase, and the experiences we share,” said NEA chairman Jane Chu in a statement.

The economic impact analysis comes as the NEA is facing severe cuts under U.S. President Donald Trump’s proposed budget, and one year after the agency staved off the threat of total elimination by his administration.

For industry advocates, the findings underscore the key role of the arts in the American economy. “The U.S. [BEA’s] research makes clear that, if you care about jobs and the economy and infrastructure, you need to care about the arts,” said Robert L. Lynch, the CEO and president of Americans for the Arts, in an emailed statement. “Strategic investment in our arts and cultural organizations is not an extra, it’s a path to prosperity.”

“What’s great about this government report is formal recognition of arts and culture as an industry by the economists of the U.S. government. So in the same way that ‘travel and tourism’ is treated like a real industry, so are the arts,” said Margy Waller, a senior fellow at the research group Topos Partnership, in an email.

The report “clearly demonstrates that the cultural sector is as vital as ever,” said Tom Finkelpearl, commissioner for New York City’s Department of Cultural Affairs (DCLA), in an emailed statement.

“The economic impact of culture is one key piece of the argument in support of arts funding, alongside the benefits it brings to individuals and to our communities,” he noted. New York City’s creative sector employed 295,755 people—accounting for 7% of all jobs in the city—in 2013, according to the Center for an Urban Future’s “Creative New York” report.

The new national analysis showed that the arts ran a trade surplus of $21 billion in 2015, meaning that the U.S. exported more cultural products and services than it imported. The film and television industry generated the bulk of that figure, with $17.9 billion in exports. The overall finding is striking given the White House’s stated concern about the U.S. trade deficit, with President Trump ordering new and controversial tariffs on steel and aluminum imports on Thursday.

The 2015 data included detailed state-by-state breakdowns for the first time. New York and California, unsurprisingly, saw the greatest economic impact from the arts, with the sector adding $114.1 billion and $174.6 billion to the two states’ economies, respectively. But the economic impact of the arts is widespread across the country: In Utah, arts and cultural employment grew 5% between 2014 and 2015, outpacing California’s 4.2% and New York’s meager 0.4% growth over the same period. Georgia saw the largest employment bump in the sector, at 5.5% between 2014 and 2015.

Other surprising findings of the state-by-state breakdown include Indiana’s vibrant musical instrument manufacturing industry, the importance of the film industry to Louisiana’s economy, and that in Colorado, arts and culture contributed more to the state’s GDP than mining and transportation, generating $13.7 billion in 2015.

But the largest economic impact nationwide came from the usual suspects: broadcasting, which generated $127 billion in economic activity; followed by the motion-picture industry, which accounted for $99 billion; and non-digital publishing, with $77 billion of economic activity. The “arts-related retail trade”—which includes everything from art galleries to book stores—generated $51 million in 2015. But the arts-related retail trade employed 767,000 people to “provide arts and cultural goods and services,” making it the second-highest-employing industry in the arts and culture sector.

Independent artists, writers, and performers collectively added $22 billion to the U.S. economy in 2015, a figure that saw a 2.8% average annual growth between 2012 and 2015. The industry employed 144,000 people in 2015. Museums generated $5.3 billion in economic activity, with an average growth of 0.8%.

The government (federal, state, and local) also provided a major $101.5 billion boost to the sector, mainly in visual and performing arts education funding, according to the data. “The government’s greatest contribution to arts and cultural production is in educational services, a commodity that describes visual and performing arts education at public primary and secondary schools and at public colleges and universities,” noted the report. The finding highlights that the government funding for the arts extends well beyond the current $149 million budget of the NEA.

While the data will no doubt provide an important talking point as arts advocates again defend the NEA from cuts, there is evidence that the public itself doesn’t respond to the economic analysis the same way. A 2010 study conducted by Topos, the research organization, found that the public is often skeptical of claims regarding art’s economic impact, which they may not see directly themselves.

“While economic data about the arts can be useful when meeting privately with elected decision makers, there’s no evidence that it is persuasive to the general public,” said Waller. Instead of viewing the arts and cultural sector as  an economic commodity, she has argued, it should be thought of and advocated for as a public good benefiting everyone through a ripple effect—extending beyond those who go to cultural events or directly depend on the sector for a job.

Source: Artsy 

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Faked Furniture and Invented Provenance

Fellow appraiser Xiliary Twil sent me an interesting article from the NY Times on a recent furniture fake. It it timely as it fits with my presentation at the International Society of Appraisers annual conference on readily apparent identity and authentication.  Well worth reading to show that even experts can be deceived and fooled by fakes and invented provenance and documentation.

The ISA conference was excellent, feedback has been very positive. The presentation I moderated with AIG Private Client Group directors was extremely well received and the tale and Q&A portion was very active.

A few images during my Readily Apparent Identity presentation

Next ISA annual conference, in April 12-15, 2019 will be in Louisville. Save the date!

The NY Times reports

The Civil War memorial secretary was widely embraced as a folk art treasure. Fashioned from walnut, maple and oak, it was said to have been created circa 1876 to honor John Bingham, a Union infantryman who had fallen at Antietam.

Profusely adorned, it featured a music box that played “Yankee Doodle” and it was accompanied by a letter from a Bingham descendant, describing the significance of the piece to the family. “I was astonished by it,” said Wes Cowan, an auctioneer and dealer who examined the secretary at the Winter Antiques Show in New York in 2015.

The owner, Allan Katz, had bought it months earlier from a Massachusetts dealer for an undisclosed price, and was now trying to sell it for $375,000. “Clearly,” Mr. Katz, a Connecticut antiques dealer, said in a video filmed at the show, “we are hoping that it might go to an institution, because it really would be wonderful to share this with the public on a day-to-day basis.”

So it was gratifying, Mr. Katz said in an interview, when the Wadsworth Atheneum in Hartford purchased the work and gave it prominent display.
In recent weeks, though, the museum has had to acknowledge that the carefully crafted secretary with the compelling story is actually an exquisite fake. And the forger has now come forward, not only to acknowledge and apologize for his sin, but also to bask a bit in how artful his deception has been. “It’s the apotheosis of my own making,” the forger, Harold Gordon, said in a recent interview. Mr. Gordon sold the piece to Mr. Katz, and in the process fooled many experts in the antiques world. “I lied,” said Mr. Gordon, 69. “I cheated. I stole.”

Fake antiques are far from rare, but few match the sort of ambitions and artistry as that created by Mr. Gordon, experts said. Robert Cheney, director of the Willard House & Clock Museum in North Grafton, Mass., likened this caper to that of the “great Brewster chair,” created in 1969 by a former police officer who passed it off as a rare, 350-year-old piece. It ended up in the Henry Ford Museum in Michigan. Occasionally, museums display fakes intentionally. One of the most popular recent exhibitions at the Winterthur in Delaware was devoted to forgeries, according to Linda Eaton, co-curator of the display. It opened, appropriately, last April Fools’ Day. Mr. Gordon said he had no grand plan for trickery when he set out around 2010 to create his phony memorial in the workshop of his home in Templeton, about an hour outside Boston.

A self-taught woodworker, he labored off and on for months as he turned a plain-looking, if old, secretary into a detailed piece rich with the patina of history. Mr. Gordon, a stickler for details, said he tried to imagine how a simple, rural country craftsman in the mid-19th century would have approached such a project. “What standards of excellence did they have?” he asked himself. Among his additions: a clock crowned by an eagle and the words “The Union Preserved” near the base. But to make it work, he said he knew it would need a story. So Mr. Gordon, a student of history, imagined the piece as an heirloom of the Binghams, a real family with Civil War ancestors.

John Bingham and his brother Wells, both from East Haddam, were privates in the 16th Connecticut Infantry, who, as teenagers, saw their first action on Sept. 17, 1862, at the Battle of Antietam. John, 17, was killed there; Wells, 16, survived. Mr. Gordon said he decided to describe his handiwork as a gift that had been presented on July 4, 1876, by Civil War veterans to Wells in honor of John, and then handed down to Wells’ son, Edgar. He had appraised the estate of a Bingham family member, giving him insight into their ancestry. He taped a typewritten note inside the secretary that he had dated Sept. 22, 1972. It, too, was forged, embellished with aged, yellowed tape, artful tears and typing errors. He signed it by mimicking what he imagined to be the shaky hand of an elderly Edgar M. Bingham. “This desk made for my father Wells Anderson Bingham,” the note read, in part. “A tribute to his brother John killed September 17, 1862, at the battle of Antietam.” In handcrafted “barnyard bone” — from a cow or horse — Mr. Gordon spelled out “Antietam” and “Sept. 17, 1862,” the bloodiest day in American history, and mounted them on a front drawer. In a crowning touch, Mr. Gordon attached a canister to the front of the secretary, and in it he placed a small scrap of a flag bearing a star.

He had found a piece of period fabric, which he presented as a remnant of a flag carried by the 16th during the battle. “I was never at a point where I was doing it to show off, to show how great I was,” Mr. Gordon said. “It simply became a creative process.” At first, Mr. Gordon said, he left the secretary in his living room where he occasionally entertained offers from visitors who wanted to buy it. He always declined. But then he ran into some money problems, he said, and decided to unload it to Mr. Katz in an act of desperation.

The Wadsworth, which has not disclosed what it paid for the secretary, displayed it as a powerful artifact, beautiful in its creation and meaningful in its significance to the history of Connecticut. But in late 2016, it received an anonymous tip that the piece was fake, investigated and late last year quietly removed it from public view. Clayton Pennington, editor of Maine Antique Digest, was also tipped off to the problem with the secretary. He soon found a photograph that had been taken in the Gordon living room of an unadorned secretary that looked suspiciously like an image he had found online of the fully realized Bingham memorial secretary in the same spot. But when he first spoke with the museum, a curator told him, he said, that the institution was still studying the issue of authenticity. He also called Mr. Katz and told him about his finding. Mr. Katz said he then confronted Mr. Gordon, who confessed and apologized. “It has been a humbling and difficult experience,”

Mr. Katz said last week, “but at least I was able to play a key role in helping to expose this masterpiece of deception.” In late February, Mr. Pennington published a lengthy report that declared the secretary a forgery. After the article appeared, the Wadsworth issued a statement, promising to “review our accession process and make every effort to ensure that art we acquire is what it purports to be.” Mr. Katz, a dealer in American folk art since 1985, gave the museum a full refund. He said he was not ready to decide yet whether he would try to recover any losses from Mr. Gordon. Mr. Gordon, an antiques dealer since the 1970s, said he figures he’s a “pariah” in the business now because of the forgery. “It has ruined my life,” he said, but he said no legal action has been taken against him. Still he exhibits a creator’s pride toward the craftsmanship he displayed. “That thing,” he said, “should be in a museum.”

One Bingham descendant said he found the hoax amusing, even if Mr. Gordon had falsified a portion of his family’s history. Michael Cone, a 64-year-old retired physician from Maryland, who has an interest in the Civil War, said he has ancestors on both sides, including the Bingham brothers. Mr. Cone, who was born in Louisiana, said he was not bothered that the brothers’ history had been misappropriated. “They deserved it,” he said, jokingly, “since they were my Yankee cousins.” 

Source: The NY Times

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