Klotz v. The Queen

Klotz v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2004-02-13
Neutral citation
2004 TCC 147
File numbers
2003-308(IT)G
Judges and Taxing Officers
Donald G.H. Bowman
Subjects
Income Tax Act
Decision Content
Docket: 2003-308(IT)G
BETWEEN:
FRANK KLOTZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on January 26 to 29, 2004 and on February 3, 2004
at Toronto, Ontario.
Before: The Honourable D.G.H. Bowman, Associate Chief Justice
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Thomas Boddez
L. Michele Anderson
Counsel for the Respondent:
David E. Spiro
Arnold H. Bornstein
Sointula Kirkpatrick
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is .......
Signed at Ottawa, Canada this day of March, 2004.
"D.G.H. Bowman"
Bowman, A.C.J.
Citation: 2004TCC147
Date: 20040213
Docket: 2003-308(IT)G
BETWEEN:
FRANK KLOTZ,
Appellant,
And
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment made under the Income Tax Act for the appellant's 1999 taxation year.
[2] In filing his return of income for that year the appellant included in his "total gifts" as defined in subsection 118.1(1) of the Act under subparagraph (a)(i) of that subsection the sum of $258,400. He alleged that this amount was the fair market value ("fmv") of 250 original prints which he donated to Florida State University ("FSU") on December 30, 1999 and was to be included in the computation of his "total charitable gifts" as defined in subsection 118.1(1) of the Act. He therefore claimed a deduction in computing his tax payable using $258,400 as one of the components of B in the formula in subsection 118.1(3).
[3] The Minister of National Revenue disallowed the claim on the basis that the fmv of the prints was at most $300 per print, or $75,000 in total, the amount paid by the appellant. The Minister also took the position that the prints were not personal use property. The Minister also assessed penalties under subsection 163(2) of the Act. As a separate allegation of fact the respondent says that the fmv of the prints was only $50. This position was not pressed in argument.
[4] The result of these various positions is as follows:
(a) If the prints were personal use property of the appellant with a fmv of $1,000 each, subsection 46(1) deems the adjusted cost base ("ACB") to be the greater of $1,000 and the ACB otherwise determined, and the proceeds of disposition otherwise determined. In the result the appellant realized no capital gain or deemed capital gain because his ACB and his proceeds of disposition are both $1,000 per print. He would nonetheless get a charitable donation tax credit based on a fmv of $1,000 per print.
(b) If the prints are not personal-use property but nonetheless had, at the date of donation, a fmv of $1,000 each he would still get his charitable donation tax credit based on $1,000 per print, but he would also realize a capital gain based on proceeds of disposition of $1,000 (subparagraph 69(1)(b)(ii)) and an ACB of $300.
(c) If the prints are personal-use property with a fmv at the time of donation of $300 per print he would realize no deemed capital gain because of subsection 46(1) but his charitable donation tax credit would be based on $300 per print and not $1,000. Subsection 46(1) obviously has no effect on the operation of section 118.1.
(d) If the respondent's alternative position that the prints had a fmv of $50 were sustained the charitable donation tax credit would be reduced even more and there would obviously be no capital gain regardless of whether the prints were personal-use property. If they were personal-use property the capital loss would be nil (subparagraph 40(2)(g)(iii)). If they were listed personal-use property the loss could be carried forward against any gains from the disposition of listed personal property.
[5] The parties entered into a statement of agreed facts and in addition four witnesses were called by the appellant: the appellant himself, Mr. Klotz, Joan Krawczyk, a New York art dealer, and two experts in the appraisal of art, Ms. Kathleen Laverty and Richard-Raymond Alasko.
[6] The respondent called no witnesses.
[7] I shall not reproduce in full the lengthy statement of agreed facts. It forms part of the record if the matter is appealed. It consists of 16 pages plus an appendix and it incorporates 54 books of exhibits.
[8] In summary, the facts are these: Mr. Klotz is one of about 660 individual Canadian taxpayers who participated in a program called Art for Education or AFE.[1]
[9] Under the AFE program the Canadian taxpayers acquired limited edition prints which they donated to colleges and universities that were prescribed for the purposes of paragraph 118.1(1)(f) of the Act. They bought the prints from the promoters of the program for about $300 per print and immediately donated them to the universities or colleges and received a receipt for $258,400 or approximately $1,000 per print, which they used to support a claim for a charitable gift tax credit under subsection 118.1(3).
[10] The promoters of the program were Galleries Consultants Ltd., an Ontario corporation, which changed its name to AFE Consultants Ltd. ("AFEC"), Empyrean Galleries Inc. ("Empyrean"), an Alberta corporation, and Curated Prints Ltd. ("Curated"), a Delaware corporation which acted as bare trustee for Empyrean. AFEC and Curated were associated corporations.
[11] The way it worked in the case of Mr. Klotz was that Curated, through a person Hazel Hett, who retained Ms. Krawczyk, acquired prints from artists or dealers. Ms. Krawczyk's instructions were pay no more than US$50 and this was the price typically paid. Novak Graphics Ltd., a Canadian source, was paid CDN$50, $55, $70 or $75 per print. Ms. Krawczyk testified that she was sometimes able to acquire prints for less than US$50 - in some cases as little as US$5, in others $20. Prints were acquired in large quantities. In 1997, 1998 and 1999 when the program was in effect, over 63,000 prints were acquired.
[12] In light of the prices for which Ms. Krawczyk, on behalf of Curated, was able to obtain the prints the other instruction to Ms. Hett may seem a little strange. It was that the prints she acquired should have a value of CDN$1,000 or more. I say strange because the man on the Clapham omnibus might find it anomalous that a person could be instructed to acquire prints having a value of at least CDN$1,000 for a price not exceeding US$50. But then, the man on the Clapham omnibus would probably not be familiar with the art scene in New York in the 1990s or the methods devised to make mass charitable gifts of art a profitable endeavour.
[13] It may be useful to look at just what Hazel Hett's contract provides. It reads as follows:
PERSONAL SERVICES CONTRACT
HAZEL HETT of 1457 Churchill Drive, WA 98281 agrees to perform the following services to the benefit of Empyrean Galleries Inc., a company duly incorporated under the laws of Albeta. All services are to be performed in New York and Washington State.
· Locate suitable premises in New York City for the storage and distribution of art.
· Arrange for the purchase of fine art prints each having a value of $1,000 Cdn or more. Such prints shall be delivered to the New York warehouse.
· Arrange for photography in New York of all art works delivered to the warehouse.
· Design and implement an inventory control system for the art inventory.
· Design and implement a shipping program for the art.
· Locate and hire the following:
2 qualified appraisers.
Packing and shipping staff as necessary
· Arrange for the donation of art to qualified charities.
· Assist in the design of the marketing brochures.
· Assist in the designing of materials to educate the marketing team.
EMPYREAN GALLERIES INC. in consideration for receiving the services detailed above undertakes and covenants to perform the following
· Reimburse Hazel Hett for all expenses incurred related to the management of the business within ten (10) days of the invoice being submitted.
· Pay Hazel Hett $300,000 CDN annually. Payments to start January 1, 1999.
· Parties may extend such term annually, provided the parties have mutually agreed to same prior to each anniversary date.
_______________________ ______________________
Hazel Hett Date
_______________________ ______________________
Empyrean Galleries Inc. Date
[14] In addition to the US$50 paid for the prints by Curated to the artists or dealers, it had other expenses:
(a) A commission of $5 per print to the person who acquired the prints for it;
(b) The cost of storage, insurance and shipping of the prints;
(c) A management fee of $125 or $135 per print to its associated corporation AFEC. Since over 63,000 prints were donated under the program the management fees would have amounted to over $8,000,000; and
(d) the cost of retaining the valuators Kathleen Laverty and Roger Woltjen.
[15] Curated sold the prints to the 660 Canadian taxpayers for prices that generally ranged from $290 to $320 per print. The price varied depending on the number of prints purchased. The Statement of Agreed Facts sets out two examples of the purchase invoices. Several versions were used in 1999. One version used in 1999 read in part:
1 - 9 Works: Current Market Value (retail price at Galleries)
10 - 49 Works $500.00 CDN a piece
50 -99 Works $350.00 CDN a piece
100 - 249 Works $320.00 CDN a piece
250 + Works $300.00 CDN a piece
Each work will be from Curated Prints Ltd.'s inventory and will have a minimum fair market value of $625.00 US as determined by an independent appraisal to be provided on closing.
Another version read:
1 - 9 Works Current Market Value
10 - 24 Works $500.00 CDN a piece
25 - 49 Works $360.00 CDN a piece
50 - 99 Works $345.00 CDN a piece
100 - 249 Works $320.00 CDN a piece
250 + Works $300.00 CDN a piece
Just what 'Current Market Value' meant is uncertain.
[16] Some individuals associated with the AFE program including the appraiser Ms. Laverty acquired prints under the program and received discounts.
[17] Volume 5 of the 54 books of documents is a document prepared by Kroll Lindquist Avey. It is referred to as the Kroll Material. It consists of schedules summarizing information about the prints donated by the Canadians and about the prints donated by many other donors in the AFE program in 1997, 1998 and in 1999. This document summarizes material in 11 of the 54 books of documents relating to a substantial number if not all of the works purchased in the program.
[18] In summary there were 24 donation recipients 23 of which are United States educational institutions and one of which was an institution in Israel. There were 63,074 prints donated in the program. There were numerous artists and print names. It appears that most of the donors bought enough to entitle them to the lower prices charged by Curated.
[19] Mr. Klotz's donation to FSU comprised 250 prints created by 30 artists. They were bought for $75,000 on December 28, 1999 and donated on December 30, 1999 for which he received a charitable donation receipt of $258,400. He never saw the prints, never had possession of them and had no role in choosing them. They were shipped directly to FSU. He participated in the AFE program in 1998 as well to the extent of 333 prints, which he gave to Providence College of Providence, Rhode Island and claimed a charitable deduction based on a fmv of $381,350. That year is not before the court.
[20] Mr. Klotz is senior vice president of capital markets at a company Prebon Yamane. In 1997, 1998 and 1999 he earned a substantial income and is sophisticated in financial matters. He brokers interest-rate derivative products to financial institutions.
[21] He became involved in the AFE program on the advice of his financial advisor, Mr. David Brill, who had brought him similar programs in the past. He stated that he trusted Mr. Brill. It is not entirely clear that Mr. Klotz was aware that out of the $125 or $135 per print management fee paid by Curated to AFEC, AFEC paid financial planners who recommended the AFE program to the taxpayer 10 to 15 per cent of the price paid.
[22] One thing is clear, albeit probably irrelevant to what has to be decided here, and it is that Mr. Klotz's motivation in participating in this program was purely the anticipated tax benefit. The broadening of the cultural or intellectual horizons of the students at FSU was not a factor. He never asked what FSU was going to do with the prints. In 1999, FSU received 1,450 prints from various donors and presumably issued receipts for at least $1,450,000.
[23] He received substantial promotional materials from the AFE program. They contain a page or two of idealistic and somewhat hifalutin verbiage about the social benefit of giving art to educational institutions but the bulk of the material has to do with the tax advantages. Two opinions from well-known law firms were received. The opinions are carefully drafted but like most legal opinions that I have seen in respect of transactions in which the reduction of tax is a significant factor, they are more in the nature of a dissertation on the various provisions of the Act in the government's arsenal that might be used to attack the intended tax result. Such opinions are stated to be subject to so many qualifications, provisos and assumptions that it is difficult to see how a client could derive much comfort from them.
[24] Mr. Klotz did not receive Ms. Laverty's appraisal until after he had donated the art works.
[25] It is unnecessary for me to deal at any greater length with the donor. Mr. Klotz made a mass donation of limited edition prints to FSU. He did not see them or have them in his possession. He was indifferent as to what they were or who they went to or what the donor did with them. His sole concern was that he receive a charitable receipt. None of this is relevant to the issue. A charitable frame of mind is not a prerequisite to getting a charitable gift tax credit. People make charitable gifts for many reasons: tax, business, vanity, religion, social pressure. No motive vitiates the tax consequences of a charitable gift.
[26] The principal question here is: what was the fmv of these prints at the date they were donated? It is not suggested that they increased over 300 per cent in value between December 28, 1999 and December 30, 1999. The argument is that in December 1999 they were worth $1,000 and it is irrelevant that Ms. Krawczyk or other purchasing agents managed to persuade hundreds of artists or art dealers to part with thousands of limited edition prints for US$50 (or less, sometimes as little as US$5) or that Curated was able to sell over 63,000 prints to about 660 Canadians for about $300 per print.
[27] The basis upon which the $1,000 per print value is advanced is the valuation made by Ms. Laverty. A valuation was made as well by Mr. Roger Woltjen. Although it was put in evidence it was not tendered as an expert witness report and Mr. Woltjen was not called as a witness. The other expert, Mr. Alasko, was called to comment on the metholodogy of Ms. Laverty's and Mr. Woltjen's reports. I excluded the portion of his report dealing with Mr. Woltjen's report and I shall say nothing more about Mr. Woltjen.
[28] Ms. Laverty is an art dealer and appraiser. The report that she prepared on the value of the prints donated by Mr. Klotz to FSU had an effective date of December 28, 1999 and expressed a conclusion of value of $265,900. This is higher than the amount in the receipt issued by FSU, which followed the practice of issuing receipts in amounts that were the lower of those expressed by Mr. Woltjen and Ms. Laverty.
[29] Her report consisted of a one-page letter to which were attached schedules detailing the prints being valued containing the name of the artist, the value assigned, the number in the series if there is a series and the method of production (silkscreen, lithograph, linoblock, aquatint or woodblock). I have picked at random one artist, Stephen Davis, as an example and have reproduced below the data relating to him set out in the schedule. I do not know what the seven digit number on the left or the four digit number preceded by the letter E are. Presumably they are some type of identification.
Davis, Stephen
Untitled (Monoprints) - E7054
- Height x Width = [19.00 x 27.00 inches] or [48.26 x 68.58 cms]
Silkscreen
3,034,099
1 of 200
$1,000
3,034,100
2 of 200
$1,000
3,034,107
9 of 200
$1,000
3,034,119
21 of 200
$1,000
3,034,125
27 of 200
$1,000
Untitled black & white squares with drawing - E6987
- Height x Width = [19.00 x 27.00 inches] or [46.26 x 68.58 cms]
Silkscreen, mixed media
3,033,764
Unique
$1,000
3,033,773
Unique
$1,000
3,033,776
Unique
$1,000
3,033,786
Unique
$1,000
3,033,792
Unique
$1,000
[30] Of the 250 prints valued in the Klotz donation, 201 are valued at exactly $1,000 each, 13 at $1,100, 16 at $1,200, 11 at $1,400, five at $1,500, three at $1,800 and one at $2,000. One is struck by how many come in at exactly $1,000 each. Ms. Laverty's reports that are given to the donors appear to be identical in every case except for numbers.
[31] Since this is a test case it is appropriate that I reproduce in full the appraisal that was given to Mr. Klotz.
HORIZON ART GALLERIES (1994) LTD.
Denman Place P.Stn. POBox 47055
VANCOUVER, BC V6G 3E] (604) 602-0440
DONOR: Frank Klotz
60 Chancery Lane Oakville, ON L6J 5P6
RECIPIENT: Florida State University
Inspection:
Dates: 21/11/97, 8/12/97, 20/1/98, 19/6/98, 9/11/98, Location: Vancouver, BC; New York, NY;
2317199,29/10199,5/11/99,4112/99 Toronto, ON
Report date: 25/01/00 Condition: Good, unless otherwise stated
Item: 250 Original prints
Value Conclusion: $264,900.00 Cdn Effective Date: 28112199 Purpose: Current Fair Market Value (CFMV) for Donation
CFMV Definition: the highest price available in an open and unrestricted market between a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, acting independently of each other. Other definitions: AP (artist's proof) HC (hors commerce) PP (printer's proof) WP(working proof) BAT(bon a tirer)SP(state proof), TP(trial proof)
Method: Market data approach with the relevant market being retail gallery sales. The price assigned is the mode for the highest and best use, arrived at through the analysis of retail sales of like or similar properties, use of current published price indexes, and market parallels comparing artist's reputation and sales history, complexity and artistic exploration of medium, costs of production, and size of the edition. Value does not include any fees or taxes, nor does it take into consideration any future events.
TERMS AND CONDTl7ONS
This appraisal is given subject lo the terms and conditions hereinafter set forth, all of which are a part thereof unless expressly set aside in writing on the pages of this Appraisal and signed by all parties concerned.
The values expressed are based on the appraiser's best judgment and opinion and are not a representation or warranty that the items will realize that value if offered for sale al auction or otherwise. The values expressed are based upon current information on the dale made and no opinion is expressed as to any future values nor, unless otherwise stated, as lo any past values.
Stated values are given item by item unless stated as being per grouping. The total of the individual item values shall not be construed as an appraised value for the whole collection, but merely as the addition of single items. Where values are given by a grouping, the value for the group is for the whole and no opinion is given as lo individual or proportionate values within the group. Unless otherwise stated values expressed are based on the general expertise and qualifications of the appraiser as lo the purpose (value sought) and function (assigned use) involved as well as lo the most appropriate market for the items listed. Where particular detailed valuation information is relied upon, it will be so stated in writing.
Where an appraisal is made on a sample of the whole, it AU be so stated, and it will be based on the critical assumption that the sample is representative and fair. While this appraiser undertakes lo make even' reasonable effort lo ensure the samples taken are representative and fair, no warranty is given or implied that this is, in fact, the case.
Where the appraisal is based not only on the item(s), but also on factual data or documentation supplied therewith, the appraisal report shall so state by malting reference thereto and, where appropriate, attaching copies of such data and documentation to the appraisal. Should, in conjunction with this appraisal, additional services of the appraiser by requested by the client his agent or attorney, or the court (such as for added lime researching other value purposes, pretrial conferences, court appearances, depositions, court preparations, etching.) compensation for same shall be al the customary hourly rate charged by the appraiser at the time and shall be due and payable by the client immediately upon receipt of a statement for said work.
Unless otherwise noted. estimates of value are based only on visual inspection with no tests of any kind having been conducted. Unless otherwise noted, all prints are signed and numbered. Measurements and details of medium, title and editions were determined under "field conditions" and are, therefore, approximate. All written data supplied by Curaled Prints is assumed lo be correct and the appraiser has taken all reasonable action to confirm the data's accuracy.
I certify that to the best of my knowledge and belief that the facts contained in this report are true and correct. based on full and fair consideration of all the facts available; that I have personally examined the appraised property, or in the case of print editions, I have examined one print from the edition, that I have no past, present or future interest in the properly appraised; that unless otherwise noted estimates of value are based only on visual inspection with no test of any kind having been conducted, that my fee for appraisal is not contingent upon the value found; that. unless otherwise noted, no one provided significant professional assistance to the person signing this report: that this appraisal has been prepared in conformity with and is subject lo the International Society of Appraisers' Appraisal Report Writing Standard and to the ISA Code of Ethics and to the Uniform Standard of Professional Appraisal Practice (USPAP). Any departure from these standards, the reasons for such departure. and its impact on the appraiser's value conclusions were discussed with the client in advance.
Unless otherwise noted, the appraised values are based on the whole ownership and possessory interest undiminished by any liens, fractional interest or and• other form of encumbrance or alienation. This report is confidential and no change in the report shall be
made by anyone other than the appraiser. The appraiser shall have no responsibility for any such unauthorized changes. No portion of this report, including the cover page, may be reproduced copied or used in any manner by anyone other than the client, his agent or stipulated third parties, without the appraiser's consent.
The undersigned is an independent appraiser of contemporary an
(Accredited Member, International Society of Appraisers)
[32] The expert report filed in court was somewhat more extensive. It explained her methodology. Her definition of fmv is the traditional one.
[33] Because I am not prepared to accept her conclusion of value I believe that in fairness I should set out portions of her expert report and then give my reasons for agreeing with the Crown's position, even though the Crown called no witnesses. To call no expert witnesses in a valuation case can be a risky manoeuvre. Nonetheless, the court is not bound to accept any expert's opinion and ultimately the court must make its own determination of value based on all of the evidence.
[34] Before I come to her report, however, there is one point that was emphasized by counsel for the respondent and it is Ms. Laverty's purchase in 1998 of 25 prints for $200 each and, in 1999, 10 prints for $200. She donated them to an educational institution and claimed a charitable donation tax credit, which was disallowed and penalties were imposed. She has objected to the assessment.
[35] Counsel for the respondent suggests that her evidence should be rejected because she is not objective and has an interest in the outcome. Mr. Alasko - a highly qualified expert - took a somewhat more benign view of Ms. Laverty's lapse in judgement in becoming involved in the AFE program. He considered that what she did was naïve but that it did not in his view compromise the conclusion. He noted certain respects in which her report did not conform to the standards set by the Uniform Standards of Professional Appraisal Practice. He did not however endorse the conclusions but said they were "reliable in substance". He noted a number of inadequacies but said "it's not the greatest report in the world". He said "substantially I think that the report stands up. It's thin but it stands up." The expression "damning with faint praise" comes to mind.
[36] My impression of Mr. Alasko in the witness stand and upon reading the transcript is that he was a kind man who was not anxious to cause Ms. Laverty any more embarrassment than she had already been caused. The most that he could do was to give the report a very lukewarm endorsement. He made it clear that he was not endorsing the conclusions.
[37] I am not prepared to reject Ms. Laverty's report simply because of her rather minor participation in the AFE program. My concerns with the appraisal go beyond that. Counsel attacked her objectivity, independence and credibility. I prefer to examine the report objectively. It is, after all, the appraisal not the appraiser that is on trial here.
[38] Her report reads in part as follows:
Curated Prints ("CP") retained my professional services in November, 1997 to examine and appraise original prints. CP was considering acquiring original prints for resale and subsequent donation to institutions qualified to receive charitable gifts. Services were limited to estimating a fair market value based on my experience (see Appendix B: Professional Profile. Professional standards were observed. The standards established by the International Society of Appraisers were applied. The engagement was not contingent upon values assigned, and I had no interest in the prints purchased by CP, including those prints later purchased from CP by Mr. Klotz (the "Klotz Prints").
Under the terms of the retainer, many hundreds of prints were personally examined and documented. The examinations and related documentation and appraisal work was conducted over a series of two and a half years. The examinations took place in New York in November and December 1997, January, September and November 1998, November and December 1999, and February 2000; in Toronto in 1999, and in Vancouver in December 1999. The examinations were in the presence of people contracted by CP to source prints.
The works examined were usually from limited editions, and were usually samples. Most of the prints were created by American artists whose primary market is in the United States. It was assumed, based on assurances from CP, that the condition of any other prints from the same edition purchased by CP would be excellent. Not all prints examined were assigned a value. For those that were, the values estimated were expressed in US currency, then converted from US$ to Cdn$ at the prevailing conversion rates between 1US$ to 1.4 Cdn$ and 1US$ to 1.5 Cdn$.
The appraised values were conservative, in order to account for the possibility of discounts offered by retail dealers. The appraised values ranged from $250 Cdn to $1800 Cdn. The value estimates were updated periodically throughout the term of the retainer to account for changing market conditions. The value conclusions for each individual print were submitted to AFE Consultants Ltd. ("AFE"), a company understood to be assisting individuals who purchased prints from CP with the donation of those prints to educational institutions.
The assigned use of the appraisal was for donation purposes. The definition of fair market value used was as follows:
"The highest price available in an open and unrestricted market between a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, acting independently of each other."
The sales comparison approach was used with the relevant market being retail sales. The cost approach or the replacement cost (comparable) was also taken into consideration. The estimate of value was the mode (the most common value) for the highest and best use of like or similar properties, using current price indexes, dealers' suggested retail prices, and market parallels comparing the artist's reputation and sales history, the complexity and artistic exploration of medium, costs of production, and the size of the edition. The fair market value did not include fees or taxes, nor did it take into consideration any future events.
B. Value Conclusions
The values assigned to each of the individual Klotz Prints are shown in Appendix A. The values ranged from $1000 CDN to $1800 CDN. For the 250 Klotz Prints:
Fair market value: $264,900 CDN as of December 28, 1999
C. Scope of Review
The process used to examine, document and research values for the Klotz Prints began with the examination of prints as outlined in the Introduction. At each of the viewing locations other than Vancouver, the person who purchased prints on behalf of CP was present. As a starting point for analysis, CP in most cases provided a list of works with descriptions, photographs of each work, and biographical material.
Each work (or a sample from the same print edition) was examined and the following details and qualities were noted:
artist, title, date of production, size of paper, size of image, quality of paper, print technique (see appendix C), edition size, condition and quality of the image.
The complexity of the print was noted. The artist's biography, price history, and price lists (current and past) were studied. During the two and a half years that the examinations were conducted, extensive time was spent visiting galleries, attending auctions and art fairs, checking the resale market, reading trade publications and conducting general research. Appendix D is a chart summarizing by artist/print all of my research used to determine market values for the Klotz Prints.
Numerous sources were used to conduct the research required in order to estimate the fair market value of the Klotz Prints:
1) Representative galleries and dealers: Retail inventory lists were reviewed and verbal confirmation of recent sales of works by the artists from the Klotz Prints was obtained.
2) Published price lists: Reliable sources to determine artists' retail prices are from the publisher's/distributor's suggested retail price lists. The price lists are readily available to the individual consumer at many art fairs across the United States, on the Internet, and at the galleries with exclusive representation of an artist. In researching values for the Klotz prints, published price lists were consulted.
3) Comparables: When qualities of one item are compared to similar items by the same artists and/or to similar items by other artists the values for the comparables are helpful in estimating value. Comparables were sought for all of the Klotz Prints.
4) Biographies: The artist's credentials were reviewed to note the level of relevant education and gallery representation. The dates and venues of exhibitions, lists of public and corporate collections, and bibliographical sources were reviewed to help associate an artist with his peer group. These associations help establish a reasonable price range for an artist's works.
5) Art Fairs: International Art Fairs were attended on a regular basis to maintain and develop knowledge of the print market, which was used in appraising the Klotz Prints.
6) Trade magazines: Some publications such as Art in Print, Art Business News, and gallery catalogues are sources of prices for the most current work by artists. Other trade magazines such Art in America confirm the importance of an artist through reviews and articles. These publications, issued and reviewed monthly contributed to the knowledge applied in evaluating the Klotz prints.
Appendix E is a list of the sources used in the Klotz appraisal.
[39] Ms. Laverty considered three approaches to value: income, cost and market data. She rejected the income and cost approach and chose the market data or sales comparison approach. In using this approach she explained why she turned to what she described as the "retail" market rather than the "wholesale" market.
The research for the market data or sales comparisons began by examining both the wholesale and the retail markets. There is a wholesale print market but, as with other commodities, transactions take place in the wholesale market only where special conditions are met, one of which is the volume of prints purchased. Wholesale transactions involving multiple prints are made to the art trade, at prices not available to members of the general public seeking to acquire a single print. Print publishers, artists, and dealers who are continuing to promote the artists' works have a vested interest in making sure that the wholesale buyer would not be harming the current market for works by the same artists. Any wholesale transaction would be predicated on the protection of the market value that the publisher/artist/ dealer had worked hard to build and maintain.
The Klotz Prints were to be donated to an educational institution for the benefit of its users. The review of the larger publishing and distribution print businesses clearly indicated that there are hundreds of thousands of prints being created and available in the American retail market every year. When compared to the total number of prints sold at retail outlets between December 1997 and December 1999, the number of prints CP sold at wholesale was a small percentage of the market, and would not be large enough to have any impact on the retail market. Although Klotz and others may have purchased their prints at a wholesale cost, there exists a far larger market for the prints at the retail level.
Cost and value are two different concepts. Cost is the price paid, which, depending on the circumstances surrounding the purchase can differ significantly from fair market value. The latter is the highest price available in an open and unrestricted market between a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, acting independently of each other. The most common market where fair market value is determined is the retail, not the wholesale market. The highest and best use for each of the individual Klotz Prints is in the retail.
The market data or sales comparison approach, which is the analysis of similar sold properties, was the approach to value considered to be the most useful in estimating values for the Klotz Prints. The value assigned to each print was the mode (the most common value) for the highest and best use of like or similar properties, using current price indexes and market parallels comparing the artist's reputation and sales history, comparing the complexity and artistic exploration of medium, the costs of production, and the size of the edition. The state of the retail print market from December 1997 to December 1999 was stable.
3. Relevant Markets Considered in Applying the Sales Comparison Approach
The retail markets researched were both those of retail sales and secondary market sales of international auctions and of secondary market dealers. The auctions research did not provide sufficient information about the value of the Klotz Prints. Price lists from dealers were useful for sales comparison purposes. The research established that artists whose works are readily available at retail outlets created most of the Klotz Prints.
The American-retail print marketplace is very large, and is characterized by many different business structures. The most relevant of these for most of the Klotz Prints, which are all original prints, is the printer to publisher to distributor business structure. This structure has the ability to build and sustain the print market so that through an orderly distribution over a few years the maximum prices can be realized.
The artists who created the Klotz Prints fall primarily into two basic groups, with some overlap. The following artists have or had their works printed, published and marketed by others: Asmar, Bratt, Diamond, Hall, Hardy, Jian, Jones, Kidder, King, Izquerdo, Morris, Nesic, Slonem, Sonfist, Saito, Tobey, Walker, and Zox. Companies who print and distribute and sell their artists' works through a network of galleries and art auctions, a system otherwise known as orderly distribution, control the market for these artists. There is also a reasonable expectation that a high percentage of a print run will sell within a few years. Unforeseen market conditions, and unusual business circumstances are some of the reasons to cause those expectations not to materialize. These publisher/distributors use a suggested retail price list, which is readily available to the consumer. Artists in this group will produce upwards of six images a year, generally in large print runs to accommodate the demand of a chain of galleries that will range from two or three and up to fifty or sixty. The life span of a print within this system may only be five to six years before any remainders are shelved while newer works are promoted in the galleries. The qualities of these prints remain the same as when they were sold at their last listed retail prices therefore their value does not diminish. Their price is supported through the ongoing sales of similar works by the same artists, through the facilities of the dealer or publisher.
The second group of artists do their own printing but their distribution/marketing is primarily left to dealer/distributors. These artists are Consagra, Davis, Hewitt, Kent, Marca-Relli, Mock, Poloukhine, Porter, and Storey. Their prices are also supported by the dealer/distributor but, on a smaller scale. These dealers will sell at retail or at discounts to other dealers, using a sliding scale tied to volume buying. These artists generally produce smaller print runs primarily because their perceived front end demand is not as high as those being promoted through large companies.
The information from the market research for sales of Labrie, Szkola and Walker prints was minimal. Because direct sales information was not found, the next closest comparisons were sought for works with similar physical properties, complexity of the technique, and the quality of the image.
For those artists with an established publisher/distributor price history, published price lists, gallery price lists and artist's price lists were examined. To establish the value conclusion for each of the Klotz Prints the most weight was given to values found for the same print, and then to values found for similar works by the artist (size, medium, print method, image). Where no values were found for a print then the values were sought for comparable items and a reasonable value was assigned. Some artists also produce and sell works in other media such as drawings, paintings and sculpture. Information regarding c