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.

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