## Facts

- David Smith, a prominent sculptor, died on May 23, 1965, owning 425 unsold sculptures he had created, many stored at his studio in Bolton Landing, New York.
- The estate filed a federal estate tax return valuing the 425 sculptures at $714,000 in the aggregate.
- The Commissioner determined a large estate tax deficiency, based largely on valuing the sculptures substantially higher than reported.
- By trial, the parties agreed that the undiscounted aggregate fair market value (FMV) of the 425 sculptures was $4,284,000.
- The estate argued the agreed aggregate FMV overstated realizable value because selling such a large quantity at once would depress prices; it sought a 75% “blockage” discount (valuing the group at 25% of $4,284,000).
- The Commissioner contended no blockage discount should apply and that the full $4,284,000 controlled.
- After Smith’s death, the estate sold some works through dealers and paid sales commissions, including to its principal gallery, and sought to deduct those commissions as estate administration expenses.

## Issues

1. Whether a blockage discount should be applied to the agreed $4,284,000 aggregate FMV of 425 sculptures for date-of-death estate tax valuation, and if so, in what amount.
2. Whether commissions paid to dealers for post-death sales of sculptures were deductible as estate administration expenses.

## Decision

- The Tax Court held that a blockage discount was appropriate for valuing the 425 sculptures because market absorption limits would depress prices if the works were offered in bulk.
- The court rejected the estate’s requested 75% discount as excessive and determined a substantial but smaller discount based on the evidence.
- The court allowed deduction of certain dealer commissions as administration expenses to the extent the sales were necessary for estate administration (e.g., paying taxes/expenses and facilitating distribution) rather than continuation of a business or speculative promotion program.
- The court directed recomputation of the deficiency under the court’s computational procedures.

## Legal Principles

- Estate tax valuation uses date-of-death FMV: the price a willing buyer and willing seller would agree to, neither under compulsion and both reasonably informed.
- A blockage discount may be applied when the value of a large block of property differs from the sum of individual retail prices because the market cannot absorb the quantity without price depression; this concept can apply to artwork as well as securities.
- The size of any blockage discount is a question of fact that must be supported by evidence about sales history, market capacity, and feasible marketing over time.
- Administration expenses are deductible only if actually and necessarily incurred in administering the estate (collecting assets, paying debts/taxes, and distributing property).
- Sales commissions may qualify as deductible administration expenses when the related sales are reasonably necessary to raise funds, reduce carrying costs, or facilitate distribution, and the commission amounts are reasonable in context.

## Conclusion

The Tax Court valued a decedent’s large inventory of self-created sculptures by applying a fact-based blockage discount to the agreed aggregate FMV to reflect market absorption constraints, and it permitted deduction of certain post-death sales commissions as estate administration expenses when tied to necessary estate liquidation and settlement objectives.


Estate of Smith v. Commissioner, 57 T.C. 650 (1972)