Blockage Discounts and a de Kooning Estate

Here is an interesting post from Law360 for all appraisal blockage geeks on a $92 million in taxes due after the IRS declined the blockage discount on the collection of Lisa de Kooning' estate, daugheter of the artist. According to the article the IRS increased the taxable estate by $231 million.

Christie's along with contributions from economic professors from George Mason University and  University of Oklahoma economics professors––the estate proposed a blockage discount of nearly 60 percent for the paintings and 85 percent for most of the sculptures, while the IRS is claiming no blockage discount for the paintings, and a initially a 50% discount for sculptures with FMV of over $100,000 (later not accepting any discount on sculptures). According to the post, the IRS refused the blockage discount analysis due to "that it expected significant appreciation in the value of the works".

It appears there was not an issue with the valuation of the works, only the application of the blockage discount.

Las360 reports
Law360, Washington (March 6, 2017, 8:52 PM EST) -- Lisa de Kooning’s estate has taken the IRS to court over a $92 million tax bill covering the estate’s interest in a vast collection of artwork from her father Willem de Kooning, the famous Dutch-American abstract expressionist whose "Interchange" is said to be the most expensive painting ever sold, according to court filings made public on Monday.

The estate filed a petition in U.S. Tax Court on Feb. 28 after the IRS increased the value of the taxable estate by $231 million. The sky-high tax hike is largely based on the IRS’ determination that it should not apply “blockage discounts” to the value of the artwork.

Blockage discounts account for the fact that the fine art market cannot absorb a massive collection at one time, and must be sold in bulk to a retailer or investment group at a far lower price. The discounts have cropped up in cases involving the artwork of Andy Warhol and Georgia O’Keefe.

The petition complained that the notice of deficiency far exceeds the agency’s original valuation of the taxable estate.

“The notice of deficiency provided no basis for respondent’s decision to make adjustments that were inconsistent with the statement of value,” the estate wrote. “As a result of respondent’s erroneous, arbitrary and capricious actions, the presumption of correctness does not attach to the notice of deficiency, and respondent bears the burden of proof in this case."

New York-based Willem de Kooning rose to prominence between 1948 and 1953 and is perhaps best known for his abstract figurations in his “Women” series, one work of which reportedly sold for $137.5 million in 2006. Another painting, "Interchange," sold to a billionaire for $300 million in 2016, said to be the highest price ever paid for a painting.

Lisa de Kooning inherited 57 paintings, 83 sculptures and 51 drawings done by her father upon his death in 1997. In 2013, a year after Lisa’s death, the estate requested a statement of value for the artwork from the IRS’ art appraisal division. In tandem with the request, the estate submitted an appraisal from Christie’s Appraisals pegging the value of the corpus at $231.4 million before any discounts. In a separate blockage discount memorandum––based on consultations with George Mason University and University of Oklahoma economics professors––the estate proposed a blockage discount of nearly 60 percent for the paintings and 85 percent for most of the sculptures.

The IRS’ art appraisal division largely rejected the submissions, finding that no blockage discount should apply to the paintings given that it expected significant appreciation in the value of the works, and only a 50 percent discount for sculptures valued at more than $100,000, the petition said. After applying those discounts, the IRS’ statement of value pegged the artwork at $255.2 million.

In filing its return for the year 2013, the estate submitted additional information to challenge the agency’s statement of value, ultimately reporting that the artwork has an after-discount value of $100 million. In response, the IRS increased the pre-discount value of the artwork nearly $60 million above what it had previously determined in the statement of value and slashed its original 50 percent discount for sculptures to zero, according to the petition.

The IRS also increased the value of the interest the estate had in real estate in East Hampton, New York, and disallowed a $1 million deduction for a “charitable bequest” to the Willem de Kooning Foundation. The agency nixed a slew of other write-offs covering trustee commissions, dealer commissions, payroll expenses, office rent and taxes, legal fees and more.

The estate indicated that it was not challenging a $500,000 increase to the taxable estate stemming from a New York income tax refund and various decreases the agency made to the estate value for interest on New York estate taxes and more.

Counsel for the parties could not be reached for comment Monday.

De Kooning's estate is represented by David W. Foster of Skadden Arps Slate Meagher & Flom LLP.

Counsel information for the IRS was not available Monday.

The case is de Kooning et al. v. Commissioner of Internal Revenue, case number 4860-17, in the U.S. Tax Court.
Source: Law 360

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