Blockage: Estate of Georgia O’Keeffe


1992 Estate of Georgia T. O’Keeffe v. Commissioner

(by Dave Maloney) The Georgia O’Keeffe U.S. Tax Court Estate [Estate of Georgia T. O’Keeffe v. Commissioner] case focuses on blockage makes interesting reading for the appraiser in that it exposes mistakes made not only by the expert appraiser for the Petitioner (the Estate), but also by expert appraiser for the Respondent (the IRS). It was argued by the Petitioner that the estate was entitled to a blockage discount to reflect the reduced fair market value of separate categories of the works that would occur if a substantial portion of those works was offered for sale all on the date of death—not over a period of years, but rather all sold on one day.


Section 2031 — Gross Estate Defined Tax Analysts Summary:

Artist Georgia O’Keeffe died in 1986, and approximately 400 of her works remained  in her estate at the time of her death. O’Keeffe’s estate and the IRS agreed  that at the time of her death the individual fair market values of O’Keeffe’s  works in the estate totaled $72 million. However, for estate tax purposes,  the estate discounted the value of the artwork by 75 percent, claiming that  if all the works were sold in one bulk sale, they would bring only $18 million  (a “blockage discount”). The IRS used a different method to determine  the blockage discount, applying discount rates to individual paintings according  to their individual values. The IRS found the paintings to have a higher fair  market value than the estate claimed and, therefore, determined a deficiency  against O’Keeffe’s estate in the amount of approximately $6 million.

Tax Court Judge Cohen has held that the appropriate blockage discount was  37 percent and that the value of the artwork in O’Keeffe’s estate at the time  of her death was $36.4 million. Judge Cohen stated that methods used by both  the estate and the IRS in determining and applying a blockage discount failed  to reasonably quantify assumptions about the specific markets in which segments  of the works in the estate would be salable. The court reasoned that the works  should have been segmented, not necessarily by value, but by quality, uniqueness,  and salability. The court found that half of the works could only be marketed  over a long period of years and with substantial effort; to that half of the  artwork, the court applied the estate’s 75-percent blockage discount. The court  then determined that the other half of the works in the estate were salable  within a short period of time at approximately their individual values; the  court applied a 25-percent discount to these works.

Full Text:

Filed April 8, 1992   Joseph E. Earnest, R. Donald Turlington, Robert P. Worcester, Eileen Caulfield    Schwab, E. Michael Bradley, and Judith Welcom, for petitioner.

Deborah A. Butler, George E. Gasper, and James E. Archie, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION   COHEN, JUDGE: Respondent determined a deficiency of $6,014,493 in the estate    tax of the estate of Georgia T. O’Keeffe, deceased (O’Keeffe). After concessions,    the issue for decision is the fair market value after application of the    appropriate blockage discount of O’Keeffe’s works left in her estate at the    date of death. Unless otherwise indicated, all section references are to    the Internal Revenue Code in effect at the date of death, and all Rule references    are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT   O’Keeffe died on March 6, 1986, at the age of 98. At the time of her death,    there remained in her estate approximately 400 works or groups of works of    art that she had created. The total of the individual fair market values    of each of O’Keeffe’s works in the estate as of the date of death exceeded    $72,759,000. If, however, all or a substantial portion of those works had    been simultaneously offered for sale on the date of death, the availability    of such a large block of O’Keeffe’s works would have depressed the price    to be paid for each of the individual works.

The fair market value of the aggregate of the works in the estate, therefore,  as of the date of death, was substantially less than the total of the fair  market values of each individual work. The amount of the discount (the blockage  discount) to be anticipated with respect to each work of art in the collection,  however, would depend on the market for that work or works of the type represented  by that work. In order to determine the appropriate discount for particular  segments of the aggregate, therefore, it is necessary to examine the history  of the market for O’Keeffe’s works, the prospects for the market for O’Keeffe’  s works as of the date of death, the types of works to be valued, and the art  market in the United States.

O’KEEFFE IN RETROSPECT

O’Keeffe began painting in 1914. Her work was first exhibited in 1915 at the  26th Annual Exhibition — New York Watercolor Club. Subsequent to that show,  her works were exhibited at numerous galleries, museums, and shows on a regular  basis.

O’Keeffe rose to prominence in the 1920s, initially through the efforts of  Alfred Stieglitz (Stieglitz), her husband. Critical acclaim for O’Keeffe’s  work was high in the 1920s and 1930s, the period during which she produced  her popular signature large flower paintings. Until 1946, when Stieglitz died,  he controlled distribution of O’Keeffe’s works into the marketplace. O’Keeffe  became one of the best known American artists of the period between the two  World Wars. Although she lived well past the post-War period and became a celebrity,  the bulk of her work, as well as her reputation among art dealers and critics,  was based on her connection with early Modernist painting in America.

After the death of Stieglitz, O’Keeffe selected certain dealers to sell her  works on her behalf. Whether she sold through an agent or directly, O’Keeffe  imposed strict conditions and guidelines regarding the hanging and framing  of her works, how often they were to be lent and to whom, and their subsequent  dispositions. She frequently required that paintings either be resold to her  or given to a museum.

In 1970, a major exhibition of O’Keeffe’s works was held at the Whitney Museum  of American Art in New York, then traveled to Chicago, Illinois, and San Francisco,  California.

Five of O’Keeffe’s works were offered for sale at Sotheby Parke Bernet Inc.  or its predecessors (Sotheby’s) in 1970, and four of her works were offered  for sale at Sotheby’s in 1972. One of the dealers used by O’Keeffe was Edith  G. Halpert (Halpert) of the Downtown Gallery. In March 1973, an auction of  works from the estate of Halpert was conducted by Sotheby’s. That auction included  12 works by O’Keeffe that had been painted throughout 41 years of her career,  1914 to 1955, that represented all of her media — charcoal, pastel, watercolor,  and oil — and that presented the range of her canvas size. The works sold  at the auction brought strong prices, including $120,000 for an oil painting  entitled Poppies, which had been painted in 1950. One hundred twenty thousand  dollars was a large and unexpected price for an O’Keeffe painting in 1973.

In the summer of 1973, O’Keeffe met Juan Hamilton (Hamilton), a sculptor who  was working as a handyman in the area of O’Keeffe’s home in New Mexico. Thereafter  and until the time of her death, Hamilton assisted and advised O’Keeffe in  the promotion of her art. In 1976, O’Keeffe had published a luxurious book  that included photographs of her best works. The book increased the marketability  of her best works. In 1977, a major television documentary film featuring O’Keeffe  and characterizing her as a living legend was made. In about 1978 or 1979,  a book and exhibit of Stieglitz portraits of O’Keeffe stimulated interest in  her and her art.

Sales of O’Keeffe’s works in the late 1970s and early 1980s increased, partly  as a result of a generalized boom in the art market and partly because of a  more aggressive personal sales approach taken by O’Keeffe. In 1979, the average  price of a work sold by O’Keeffe jumped from tens of thousands of dollars to  $121,000. The average price of paintings O’Keeffe sold personally rose to a  high of $631,250 in 1983.

At the date of O’Keeffe’s death, she and Hamilton were working on a major  exhibition of her art to be held at the National Gallery of Art in Washington,  D C. In connection with that exhibition, a catalogue of her work was published  in 1987.

At the date of her death, O’Keeffe had produced between 1,100 and 1,200 substantial  works. The market for her works was essentially limited to the United States.

The total dollar values of sales reported by the major auction houses, Sotheby’s  and Christie’s of New York, for works by O’Keeffe, for the period 1979 to 1991,  were:

1979 $ 196,500   1980 1,100,000   1981 152,500   1982 400,000   1983 420,000   1984 1,005,000   1985 1,200,000   1986 410,000   1987 8,260,000   1988 715,000   1989 4,405,000   1990 2,905,000   1991 575,000

O’Keeffe’s works were also sold through galleries, although exact data concerning  such sales is difficult to obtain or to verify. From 1979 through 1986, one  gallery sold 16 of O’Keeffe’s works on canvas, 24 works on paper, 1 work on  wood panel, and 4 sculptures. The prices received for the works on canvas ranged  from $60,000 to $1,000,000. The prices received for the works on paper ranged  from $6,000 to $120,000. From 1978 to 1991, another gallery sold in excess  of 100 of O’Keeffe’s works. Approximately 25 works were sold for prices of  $500,000 and above, and 5 works were sold for prices over $1,000,000. Approximately  28 works were sold at prices between $200,000 and $499,999.

O’Keeffe was able to transcend her traditional market, collectors of American  Modernism, and appeal to a far broader range of buyers. The buyers to whom  her works appealed included art collectors and persons who enjoyed the beauty  of her pictures, the fascination of her myth, and the subject of her pictures.  O’Keeffe’s diverse range of subject matters, such as flowers, trees and leaves,  landscapes (New Mexico and New York), and abstractions (early and late), and  her various “periods” appealed to different segments of the public.  The market for O’Keeffe’s works included small and large museums that bought  the works or sought donors for the works, private collectors, and the general  public. Her works appealed to those who collected American “modern” art  as well as those who simply liked what she painted.

WORKS IN THE ESTATE

The works of significant value in the estate at the date of O’Keeffe’s death  ranged from early works on paper through works on canvas done in the 1970s.  The estate included many major paintings of flowers, abstracts, and landscape  subjects from the 1920s and 1930s and many large and important works from later  periods, including western landscapes and abstractions from the 1940s, 1950s,  and 1960s. The estate included paintings in series, including the Jack-in-the-  Pulpit series, Abstraction series, White Rose series, Charcoal Drawing series,  From a Day with Juan series, In the Patio series, It was Yellow and Pink series,  Nude series, Series I series, Shell and Old Shingle series, Special series  (drawings), and Yellow Horizon and Clouds series. Certain series by O’Keeffe,  for example, the Jack-in- the-Pulpit, the Clouds, and the In the Patio series,  are sought after by collectors and are highly esteemed in the marketplace.  Three works in the Jack-in-the-Pulpit series had individual fair market values  of $1,500,000, and one had an individual fair market value of $1,800,000 at  the date of O’Keeffe’s death.

The paintings that are part of a particular series show the differences in  O’Keeffe’s technique in the treatment of medium, light, form, and perspective  of one theme and show O’Keeffe’s progression as an artist. The paintings that  are part of a series are an essential part of her lifetime output and will  often have a value greater than the value each would have if it were not part  of a series.

O’Keeffe’s will, executed in 1979, a codicil, executed in 1983, and a settlement  agreement, entered into in 1987 resolving litigation over the estate, provided  for the distribution of 42 of O’Keeffe’s works to 8 museums. The works distributed  to the museums had individual values ranging from $40,000 to $1,800,000 and  a total value of $22,575,000. As a result of the settlement agreement, five  additional works were transferred to the Museum of New Mexico and the University  of New Mexico.

THE ART MARKET IN THE UNITED STATES

From 1979 to 1986, with the exception of the 1982 recession, the art market  in the United States experienced a boom period, with the values of individual  works of art rising dramatically over those years. Increased market activity  and competition drove up the prices of works of art. The relatively low prices  for American art, and specifically for early American Modernism, caught the  attention of the general art market. Consequently, between 1979 and 1986, prices  for American art generally increased severalfold. In 1986, the art market in  the United States was strong. The Sotheby’s auction in 1987 occurred at the  peak of the art market boom.

By 1986, it had become apparent to knowledgeable dealers and collectors that  the art market, particularly the highly inflated market for American art, had  grown so fast that it was becoming unstable and unreliable. A dealer could  still make a profit on the quick turnover of individual works, particularly  on outstanding examples of an individual artist’s work. Knowledgeable dealers  and collectors, however, would have approached with caution the purchase of  a large block of works of mixed quality identified with early American Modernism,  such as those in the estate.

Appraising, buying, or selling a large group of works by a single artist is  considerably different from appraising, buying, or selling a single work. This  difference is a result of the nature of the art market. The market for works  of art that sell at the relatively high values of the works in the O’Keeffe  estate is limited. Popularity among persons seeking to decorate with art is  not necessarily a reliable index of market strength or breadth.

Potential purchasers of large groups of works are dealers, collectors, and  institutions with interest and substantial funds to disburse. The art market,  however, is different from, and less secure than, financial markets. A work  of art usually does not have intrinsic financial value beyond its desirability  as art and lacks external indicia of return prior to resale, such as earnings  or dividends. Individuals and institutions interested in purchasing art, therefore,  tend to rely on the principal dealers or collectors in a particular market  for advice and on the perceived security of purchasing the type of art that  is most in demand, or is most fashionable, at the time.

Particular key dealers and collectors become identified with different specific  markets within the general art market. When considering a purchase or sale  of a large number of works by an individual artist, a purchaser for investment  would consider the potential involvement of those dealers and collectors. Without  both the involvement of those key dealers or collectors and a current broad  appeal among art patrons capable of investing at the level required, it is  exceedingly difficult to sell a large group of works. Particular individual  works may appropriately be valued at high levels.

When considering the works of a specific artist, a dealer must look within  the general art market to the specific markets that support the value of the  artist’s work. With regard to the O’Keeffe market, the dealer distinguishes  not only between the markets for European and American artists but also between  the markets for pre- World War II and post-World War II American art.

The market for European artists is substantial and worldwide. The market for  post-War American art by the outstanding American artists of the latter half  of the 20th century — artists such as Pollock, Rothko, de Kooning, and Johns  — is also substantial, although not as large as the market for European artists  such as Picasso, Miro, and Chagall. The post-War market is populated by numerous  dealers and collectors who support and facilitate that market. By contrast,  the market for early American Modernism, into which dealers classify O’Keeffe’s  works, is narrower with fewer key dealers and collectors to support it.

According to records maintained by the Art Sales Index and ArtQuest, the number  of sales of artwork at auction at a price in excess of $500,000 for 1986 through  1990 was as follows:

1986 157   1987 351   1988 526   1989 1,086   1990 856

ART EXPERT OPINIONS

The estate employed Eugene Victor Thaw (Thaw) to appraise O’Keeffe’s works  in the estate for the Federal estate tax return and for trial of this case.  Thaw had been involved in all aspects of the art market since 1950. He was  well qualified to appraise the works of O’Keeffe. Thaw had testified as a witness  on the blockage discount appropriate in the Tax Court case of Estate of Smith  v. Commissioner, 57 T.C. 650 (1972), affd. 510 F.2d 479 (2d Cir. 1975). The  Smith case was the first litigated case to apply a blockage discount to works  of art. In Thaw’s opinion, however, there was no similarity between the content  of the Smith estate and the content of the O’Keeffe estate except that the  two cases were tried in the Tax Court. The individual values of all of O’Keeffe’s  works in the estate were determined by agreement between Thaw, on behalf of  petitioner, and the Internal Revenue Service (IRS).

It was Thaw’s opinion that the appropriate blockage discount that should be  allowed for O’Keeffe’s works in the estate on the date of death is 75 percent.  Thaw’s opinion was based on the understanding and assumption that all of the  works in the estate would be sold to a single buyer as a bulk purchase, which  would require a syndicate of investors. The hypothetical buyer would have to  hold the works for many years and, in determining the price to be paid, would  take into account interest, selling costs, promotion, maintenance costs, and  carrying charges. Thaw also based his opinion on the assumption that a buyer  would consider “fluctuations from the very high market plateau for O’Keeffes  in 1986”, although he would have advised a potential buyer that prices  of works by O’Keeffe, on average, were unlikely to go down.

Thaw would not, however, have advised a hypothetical seller of the works in  the estate to sell the total of those works at a 75- percent discount. Thaw  was under the impression that determination of blockage discount required him  to assume a hypothetical buyer on the date of death who would have been required  to purchase all of the works of the estate in bulk on that date. Although Thaw’s  written report categorized the works in the estate by medium and price, he  did not differentiate among the works in determining the discount to be applied.

Barbara Rose (Rose), an art historian who had assisted O’Keeffe in relation  to the publication of the 1976 book, also prepared a written report on behalf  of petitioner. Rose identified traditional factors establishing value in the  art market as rarity, quality, size, subject matter, medium, and condition.  With reference to O’Keeffe’s works, she identified lack of scholarly reviews  or a catalogue raisonne, the “mystical and religious content of her art”,  and prejudices of sex, age, and provincialism as negative factors. Rose concluded  that a bulk sale of O’Keeffe’s works on the date of death would have resulted  in a two-thirds to three-fourths loss in value. Rose, however, would not have  advised a seller to sell O’Keeffe’s works in bulk on the date of death at the  discounted value. Rose’s opinion was based in part on her view that many of  O’Keeffe’s works in the estate were in poor condition.

Warren Adelson (Adelson), a dealer in American art, prepared a written report  on behalf of respondent. Adelson divided the art into two categories, “Bequested  Art” and “Remaining Art”. Adelson assumed and understood that:

Blockage discounts have been applied to recognize the   impact of a huge number of works of art coming on the market at the same time,    thereby disrupting the normal economics of supply and demand. Clearly blockage    is applicable to works of art that are for sale, works that impact the marketplace.    It is not applicable to works which are unavailable for sale, in this case,    bequested works.

The total value of the 80 pieces of “Bequested Art” for which Adelson  did not determine a blockage discount was $32,228,000. With respect to the “Remaining  Art”, Adelson noted that the 72 most valuable items totaled $30,975,000.  He opined that these pieces could be sold “within a few years”; he  determined “only a nominal discount” of 10 percent for those 72 items.  In his opinion, a blockage discount of 37 percent would be “fair and reasonable” for  the other 177 pieces that would “take years, perhaps a decade, to dispose  of.”

OPINION   The expert reports and the testimony at trial comprise hundreds of pages, containing    much repetition, inconsistency, and interesting, but immaterial, information.    We do not set forth such details here. We have considered all of the testimony    and the exhibits, and the facts set forth above are those necessary to understand    our conclusions.

Property includable in a decedent’s gross estate is generally included at  its fair market value on the date of the decedent’s death. Sec. 2031(a). Fair  market value is the price at which property would change hands between a willing  buyer and a willing seller, neither being under any compulsion to buy or to  sell and both having reasonable knowledge of relevant facts. United States  v. Cartwright, 411 U.S. 546, 551 (1973); sec. 20.2031-1(b), Estate Tax Regs.

The parties in this case agree that the total of the individual fair market  values of each of O’Keeffe’s works in the estate exceeded $72,759,000 on March  6, 1986. They disagree, however, as to the appropriate blockage discount to  be applied to the total. In our view, the disagreement is in large part the  result of erroneous instructions to the experts with respect to the concept  of blockage. As we said in Estate of Hall v. Commissioner, 92 T.C. 312, 338  (1989):

If the parties fail to provide the experts with complete information concerning  material facts or reasonable assumptions to be made, they undermine the reliability  of their experts and their opinions. In any case, we are not bound by the opinion  of any expert witness. We may accept an expert’s opinion or we may reject testimony  that is contrary to our own judgment, especially where the witness’ opinion  of value is so exaggerated that the testimony is incredible. Chiu v. Commissioner,  84 T.C. 722, 734-735 (1985).

In this case, the opinions of petitioner’s experts that O’Keeffe’s works in  the estate, individually valued in excess of $72 million, could have been sold  on the date of her death for $18 million, defies common sense. Our conclusion  is based in substantial part on the particular content of the works. The individual  values of 44 pieces totaled almost one-half of the agreed value of the whole  group!

Respondent’s expert’s opinion is erroneous as a matter of law. There is no  justification for his exclusion of the bequeathed art from the total subject  to discount. Determination of fair market value assumes that works are in the  market and precludes consideration that works are “unavailable for sale.” He  was not entitled to consider the actual disposition of the works of art of  the estate any more than fair market value may be determined by assuming that  particular purchasers will purchase works of art from the estate. See Estate  of Bright v. United States, 658 F.2d 999 (5th Cir. 1981); Minahan v. Commissioner,  88 T.C. 492, 499 (1987); Estate of Andrews v. Commissioner, 79 T.C. 938, 955-956  (1982).

Thaw, Rose, and Adelson each testified at trial in support of their respective  opinions of fair market value and in rebuttal of the adverse experts’ testimony.  In addition, petitioner called James H. Maroney, Jr. (Maroney), a dealer in  19th century and early 20th century American art, and Anthony M. Lamport (Lamport),  a financial analyst and advisor to venture capital funds, in support of Thaw’s  opinion. Lamport prepared a pro forma income statement, making various assumptions  about the financial return to a bulk purchaser investing in O’Keeffe’s works  on the date of death. The hypothetical purchaser assumed by Lamport would have  sold O’Keeffe’s works from a newly opened gallery in New York City. Lamport’s  analysis made no allowance for inflation in the prices of O’Keeffe’s works  but used rates of 10 percent to 32 percent to discount projected cash flow  after expenses. According to petitioner, Lamport’s analysis was intended only  to explain expenses that a hypothetical buyer would consider in determining  a fair purchase price.

Although each of the experts was qualified to express an opinion on the subject  matter on which he or she was called to testify, each of them suffered from  the same tendency to ignore relevant facts inconsistent with the position of  the party employing the expert and to exaggerate facts consistent with the  view espoused. Thus, each conclusion as to the appropriate blockage discount  suffers from substantial defects and is patently unreliable. Thaw, for example,  in effect assumed a forced sale in bulk of all of the works of the estate to  a singlebuyer. Petitioner tries to justify that assumption by arguing that  ascertainment of fair market value requires that property “must change  hands” on the date of death. That argument is unsupported by authority  or reason and ignores the concepts of willing buyers and willing sellers acting  without compulsion — the defining actors in a fair market value transaction.  Petitioner also ignores the statement in its own trial memorandum that:

the court has rejected expert analyses and proposed transactions that are  unlikely or without foundation in the real marketplace or contrary to the interests  of a hypothetical buyer. Hall, 92 T.C. at 336-37 [Estate of Hall v. Commissioner,  92 T.C. 312 (1989)]; Newhouse, 94 T.C. at 232-33 [Estate of Newhouse v. Commissioner,  94 T.C. 193 (1990)]. Expert testimony based on a flawed legal basis or presumption  is irrelevant. Newhouse, 94 T.C. at 231.

The Court also rejects proposed transactions that are contrary to the interests  of a hypothetical seller.

Rose’s opinion relied on her concern with the condition of certain of the  works of art in the estate, although the individual condition of each work  presumably would have been taken into account by Thaw in reaching the individual  appraisals of the work. Thaw never indicated otherwise. Both Thaw and Rose  conceded that they would not have recommended to a seller that the works in  the estate be sold for the $18 million that they opined was the blocked value  of the estate on the date of death.

The discounts that Adelson applied to what he categorized as “Remaining  Art” were inadequate. They were not consistent with IRS material recognizing  blockage discount and explaining it as follows:

The concept of blockage is essentially one of timing. A discount may be allowed  where a large quantity of any one type of art is offered on the market at one  time and would substantially depress its value. The amount of the discount  would be determined, in part, on a reasonable estimate of the time it would  take to sell the entire quantity in smaller lots. Some of the factors to be  considered in determining whether a blockage discount is available are the  opportunity cost of holding the inventory, the carrying casts of the inventory,  and the expected period of time it will take to dispose of the inventory. *  * * The extent of the collection may also be a significant factor. [The IRS  Valuation Guide for Income, Estate and Gift Taxes, CCH Fed. Est. & Gift  Rep. No. 115 (Oct. 14, 1985) at 30 (the Guide).]

On cross-examination, Adelson stated that he was aware of the factors mentioned  in the quoted material. Adelson’s opinion as to the minimal discount, however,  was inconsistent with his testimony as to the time required to sell works in  the estate and apparently did not consider any “opportunity” or carrying  costs.

In support of the approach used by respondent’s expert, respondent argues  that:

Unlike shares of stock which are fungible, individual works of art are both  distinctive and unique in both medium, size, composition, quality and saleability.  The application of an across-the-board discount to works of art, which by its  very nature ignores the uniqueness of works of art, would not be appropriate.  Acknowledging that works of art, unlike stocks, are not fungible, and incorporating  factors enunciated by the Court in Estate of Smith and Calder, respondent has  developed a tiered approach to assess the appropriateness of blockage discounts  in determining the fair market value of works of art.

Respondent’s tiered approach was based solely on individual dollar values,  i.e., no discount was applied to works valued at or more than $500,000, and  20-percent and 50-percent discounts were applied to categories of $200,000  to $499,999 and under $200,000, respectively. Respondent’s approach of considering  the specific segments of the estate and the uniqueness of pieces within the  estate makes sense and is supported by the evidence, although the specific  percentages used by Adelson do not and are not.

At the Court’s urging, respondent included a revised three- tiered proposed  discount in her brief, but the percentages suggested would still be applied  solely on the basis of individual values. We are persuaded from Thaw’s testimony  and other evidence that the most valuable works would not necessarily be sold  first and that some works of all types and values would be fed into the marketplace  at a controlled pace. The most reliable consensus of the experts is that the  better works could be sold within 7 years, and sale of the bulk of the estate  would take more than 10 years. The record does not support any specific percentages  at the levels proposed by respondent.

While the parties each purportedly rely on Estate of Smith v. Commissioner,  57 T.C. 650 (1972), affd. 510 F.2d 479 (2d Cir. 1975), each takes parts of  the opinion in that case out of context. In that case, the Court was required  to determine the fair market value of 425 pieces of nonrepresentational metal  sculptures created by David Smith. Respondent claimed that no discount should  be applied to the total and that the fair market value of each item should  simply be determined by the price at which the item could be sold separately  in the retail art market on a “one-at-a-time” basis. The estate applied  a 75-percent discount to the total. The Court stated:

We find it unnecessary, in this unusual case, to make any hard-and-fast choice  between the two approaches urged by the parties. On the one hand, we think  that the initial 75-percent discount, which petitioner has applied to the “one-at-a-time” value  in order to determine the price which a purchaser would pay for all the sculptures,  is too high. On the other hand, we think that respondent should have given  considerable weight to the fact that each item of sculpture would not be offered  in isolation. We think that, at the very least, each willing buyer in the retail  art market would take into account, in determining the price he would be willing  to pay for any given item, the fact that 424 other items were being offered  for sale at the same time. The impact of such simultaneous availability of  an extremely large number of items of the same general category is a significant  circumstance which should be taken into account. In this connection, the so-called  blockage rule utilized in connection with the sale of a large number of securities  furnishes a useful analogy. See Maytag v. Commissioner, 187 F.2d 962, 965 (C.A.  10, 1951), affirming a Memorandum Opinion of this Court; Helvering v. Maytag,  125 F.2d 55, 63 (C.A. 8, 1942), affirming a Memorandum Opinion of this Court;  Helvering v. Safe Deposit & Trust Co of Baltimore, 95 F.2d 806., 811-812  (C.A. 4, 1938), affirming 35 B.T.A. 259 (1937); Estate of Robert Hosken Damon,  49 T.C. 108, 117 (1967). We think that a museum or individual collector of  art objects would not completely ignore the resale value of a given item, although  it obviously has far less significance than in the case of a dealer. Moreover,  the “retail market” claimed by respondent may well encompass the  use of an auction method of disposal (to be distinguished from the usual forced-sale  concept) for at least a part of the art objects; in such a situation the presence  of a large number of pieces on the market at one time would be a most material  factor. Under the foregoing circumstances, we think that, in this case, the  amount which an en bloc purchaser for resale would pay and the aggregate of  the separate “one-at-a-time” values to be obtained by a variety of  dispositions in the “retail market” would be the same. [57 T.C. at  657-658; fn. refs. omitted.]

The Court took into account other elements involved in the valuation process  as they existed at the time of death and rejected the estate’s claim that future  commissions on sales of the work should be considered. The Court concluded  that the fair market value of the 425 sculptures at the moment of Smith’s death  was $2,700,000. Because the total of the individual values of the sculptures  was $4,284,000, the parties in this case translate the Court’s conclusion to  a 37-percent discount. Nothing in the opinion, however, explains the conclusion  of value by application of a particular percentage to the total.

In Calder v. Commissioner, 85 T.C 713 (1985), the Smith analogy to large groups  of securities was extended, and a blockage discount was applied in valuing  gifts of art. The Court noted that each of the parties in Calder had considered  the length of time necessary to liquidate the artwork as a primary factor in  coming up with the blockage discount. The Court then recalculated the blockage  discount with reference to the average annual sales figure for the art in question,  reducing the stream of income to its present value. Although the record here  contains some information about subsequent sales of the works in the estate,  only a small percentage of the value has actually been liquidated in that manner.  Neither party has urged application of the Calder approach here.

Respondent argues in this case that petitioner’s approach improperly takes  into account future expenses to be incurred in selling O’Keeffe’s works in  the estate. According to respondent, this approach violates section 2053, which  delineates and limits expenses deductible by an estate. Petitioner disputes  this contention, asserting that the expenses to be taken into account by a  hypothetical buyer are not affected by section 2053. Petitioner further argues  that, even if expenses were ignored, projecting sales of O’Keeffe’s works at  $5 million a year and reducing that amount to the present value would require  a discount in excess of 60 percent. Petitioner would ignore any inflation in  the prices of the works over the period of sales — an assumption we are not  persuaded to accept. Because we do not include assumptions about specific expenses  or rates of return in our analysis, we do not resolve this dispute. We do,  however, consider that the works could not be sold simultaneously on the date  of death and that carrying costs would be incurred.

Petitioner’s experts acknowledge that there is a vast difference in quality  among the pieces in the estate, although Thaw disagreed with Adelson’s assumption  that it would be appropriate to dispose of the most valuable pieces first.  Although they mentioned, and purportedly relied on, their experience with estates  of other artists, Thaw and Rose provided insufficient information for us to  make a judgment on the comparability of those situations. The attempted comparisons  to the estate of David Smith showed lack of meaningful “comparability”.  Unlike the situation in Estate of Smith v. Commissioner, 57 T.C. 650 (1972),  affd. 510 F.2d 479 (2d Cir. 1975), the evidence in this case shows that the  amount that would be paid for individual purchases of O’Keeffe’s works and  the amount that would be paid by a hypothetical en bloc purchaser would not  be the same. There is too much variation among the different O’Keeffe works  by type, quality, period, price, and other factors affecting the probable market  for each work. Overall, petitioner’s experts’ testimony was limited to the  perceptions of dealers and art critics and ignored less sophisticated elements  of the art market.

From the evidence, it is apparent to us that different works in the estate  would be of interest to different segments of the art market. The parties have  not reasonably quantified assumptions about the specific markets in which segments  of the works in the estate would be salable. Petitioner has erroneously assumed  that all of the art would initially be sold to a bulk purchaser, who would  purchase for resale. Petitioner thus ignores the market of collectors who,  while taking into account resale value, are not primarily interested in the  rate of return on the investment.

Petitioner strenuously objects to evidence that, in fact, a substantial number  of the most valuable works in the estate have been or will be distributed to  museums. We are not persuaded that the market for O’Keeffe’s works did not  include museums, and petitioner’s assertions on this point are disingenuous.  Petitioner’s experts stated, without supporting data, that museums were not  in the market for O’Keeffe’s works. This testimony, however, does not consider  whether museums were not in the market for O’Keeffe’s works only because they  anticipated distributions of 42 major works from the estate to 8 major art  museums. The evidence of actual distributions and subsequent sales to museums  refutes petitioner’s experts’ opinions about the interest of museums in O’Keeffe  and thus cannot be ignored.

Petitioner and its experts also argue that the market for O’Keeffe’s works  depended on her personality and personal sales efforts, but the objective evidence  of sales of her works after her death belies that contention. Those sales may  be considered for that purpose. It is equally plausible and more consistent  with the objective evidence to infer that the methods of sale and the postsale  constraints that O’Keeffe imposed limited the market for her works, so that  the market opened up after her death.

We conclude that the respective experts in this case each failed to consider  the relevant market for particular works of O’Keeffe or groups of works in  the estate. See sec. 20.2031-1(a), Estate Tax Regs. The failure to consider  the relevant market undermined the respective positions of the parties in an  analogous situation in Anselmo v. Commissioner, 80 T.C. 872 (1983), affd. 757  F.2d 1208 (11th Cir. 1985). There the Court was charged with the task of valuing  gemstones contributed to the Smithsonian Institution. The Court found that  the low valuations made by respondent’s experts in that case were unacceptable  because they were based on the erroneous assumption that the gems had to be  valued on a bulk sale basis. The taxpayers’ experts had reached high valuations  by erroneously focusing on the prices at which items of jewelry were sold to  customers of jewelry stores. The Court stated:

What we have in this case are two sets of valuations, each of which is based  upon a substantially incorrect view of how the property at issue should be  valued. In some cases in which experts’ valuations are based on incorrect assumptions,  it may be possible for the Court to construct reliable estimates of fair market  value by adjusting for the discredited assumptions. However, this is not such  a case. [80 T.C. at 884-885.]

On that record, the Court decided the issue against each party to the extent  that that party had the burden of proof.

We cannot rely on the burden of proof in this case. There is evidence from  which we can determine a value, although we are frustrated and imposed upon  by the lack of reliable expert opinion supporting the discounts claimed by  the opposing parties. We are persuaded that O’Keeffe’s works in the estate  on the date of her death should be segmented, not necessarily by value but  by quality, uniqueness, and salability. There should be at least two categories,  i.e., works that are salable within a relatively short period of time at approximately  their individual values and works that can only be marketed over a long period  of years with substantial effort. We believe that petitioner’s experts’ opinion  is valid only as applied to the second category of works. Respondent’s argument  is meritorious with regard to the first category. For want of a more reliable  breakdown, we conclude that one-half of the value of O’Keeffe’s works in the  estate would be appropriately subjected to petitioner’s experts’ analysis and  should be discounted 75 percent. Using our best judgment on the entire record,  we conclude that the other half of the total value of O’Keeffe’s works should  be discounted 25 percent. After considering the entire record, we conclude  that the fair market value of O’Keeffe’s works in the estate at the date of  death was $36,400,000.

To reflect the agreement of the parties and our conclusion,

Decision will be entered under Rule 155.

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