What is Blockage?
Blockage is a discount applied to the value of items to reflect the negative impact on value caused by the sudden offering of a large number of identical, or very similar, items at the same time. In such a case, the market finds it difficult to absorb all the items quickly and, as a result, value is depressed (2021 Core Course Manual, 6-12).
Blockage in the United States
Several landmark U.S. tax court cases established how blockage applies to personal property:Estate of David Smith v. Commissioner (1972):
The estate included 425 sculptures by David Smith. While originally valued at the aggregate fair market value, the court held that releasing so many works at once would overwhelm the market. Relying on expert testimony about market absorption, Smith’s historical sales, and the costs of holding and marketing the works, the court applied a flat 37% blockage discount to the aggregate value.
Estate of Georgia O’Keeffe v. Commissioner (1992): The estate contained about 400 works valued at $72 million. The estate argued for a flat 75% discount across the collection. The court rejected the flat rate discount, instead applying a tiered approach: the more desirable works could be sold with a modest 25% discount, while less marketable works were subject to a 75% discount to reflect slower absorption.
Blockage in Canada
In Canada, the Her Majesty the Queen v. Malette (2004) case set precedent. A large donation of 981 works by Harold Feist to a gallery raised questions of value. The Federal Court of Appeal recognized blockage as a valid methodology, confirming that large groups of similar works can reduce overall market value. While the Smith, O’Keeffe, and Malette cases provide important precedent for understanding blockage, appraisers cannot simply replicate the tiers, percentages, or discounts applied in those rulings. Courts emphasized that blockage depends on: Because no two artists, markets, or estates are identical, blockage analysis must be approached on a case-by-case basis. It requires a nuanced understanding of the artist’s or property’s market, informed by both public and private sales data. An appraisal report should not only demonstrate that a blockage discount is warranted but also substantiate the size of that discount with credible market evidence. Rather than relying on formulas or fixed percentages drawn from past cases, appraisers must carefully weigh the specific facts and circumstances at hand. Blockage can be complex and often requires a multi-disciplinary approach including personal property appraisers, business valuation appraisers, accountants, attorneys, statisticians, and other specialists.Fact-Specific
·The volume of works involved
·The quality and desirability of the works (using market evidence)
·The depth and stability of the market (using market evidence)
·The reasonable time required to absorb the works into the market