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June 6, 2007

What You Need To Know When Selling Collectibles At Auction

Arnold & Porter Advisory

By Raymond P. Haas

Whether you collect paintings, sculpture, antiques, books, jewelry or wine, the day may come when you wish to sell some or all of your collection. While this article is focused on selling at a live auction through one of the well-known auction houses like Sotheby's or Christie's, there are, of course, a variety of other things that you could do with all or part of your collection - for example, make a gift to your heirs or a museum, make a consignment to a dealer or conduct your own auction on eBay. Whatever approach you take, you will be faced with important economic, contractual and tax issues that should be reviewed with your attorney.

Securing The Best Arrangement: Negotiating With The Auction Houses

Auction houses have standard terms that are available to everyone, but often much better terms can be negotiated. The best way to find out the current state of the market is to get the auction houses competing against each other. Even if you conclude that one house has the best buzz in the market and therefore is likely to be able to sell your collection for the highest winning bid or "hammer" price, you may be able to negotiate a sufficiently better deal with another house so that the net proceeds to you, the seller, will be greater. Even if you end up going with the house with the buzz, openly soliciting proposals from its competitors is likely to result in an improved negotiating posture and higher net proceeds to you.

In order to understand what drives the competition, consider the basic economics of running an auction. Aside from guaranties, which will be discussed below, the auction house's expenses are largely fixed: salaries for salespeople, experts and administrators, advertising (including lovely catalogues) and rent. Income, on the other hand, is totally dependent on how much is sold at the auctions. The current "standard" terms for better paintings, for example, require the seller to pay for shipping and insurance as well as a seller's commission of nine percent of the hammer price. The buyer pays sales taxes and a buyer's premium of 20 percent of the first $500,000 of the hammer price and 12 percent of any excess over $500,000. So, for example, if your painting sold under these standard terms for a hammer price of $1,000,000, the buyer would pay $1,160,000 (the hammer price plus a $160,000 buyer's premium), and the auction house would remit to the seller $910,000 (the hammer price less a seller's commission of $90,000), retaining for itself $250,000 (the sum of the buyer's premium and seller's commission). Once enough paintings are sold to cover fixed expenses, almost all the rest is profit. If an auction house believes that you are likely to use its competitor to sell your collectibles unless it gives you better than standard terms, it makes excellent economic sense for that auction house to offer you a special deal.

So what can be on the table in these negotiations? For starters, the auction house often is willing to pay for insurance and shipping. Then there are marketing considerations, like whether, where and how often the seller's collectibles (as opposed to the auction as a whole) will be featured in advertisements, articles and posters, whether they will get special placement in the catalogue, and whether they will be exhibited to important collectors around the country or world before the auction. The seller's commission can be reduced or even eliminated. The auction house may be willing to provide a guarantee that net proceeds to the seller will meet or exceed a specified amount, albeit at the cost of giving a larger share to the auction house once that minimum is exceeded. Finally, the auction house may be willing to share the buyer's premium with the seller, although this is not likely to be combined with a guarantee.

The process of going back and forth between two or more auction houses can be exhilarating but exhausting. The author has seen two of the leading houses each improve their opening proposals three and four times in response to news that their competitor's latest bid was better than theirs. These particular proposals included guarantees, and the final guarantees were more than double the amounts initially offered! All of this typically happens in a very compressed time frame of one or two weeks, after the results from the last auction are known and before the catalogue "goes to bed" for the next one. You definitely will want to be represented in that maelstrom by an attorney, dealer or other expert who is both experienced and very good under pressure.

Remembering Uncle Sam: Collectibles And Tax Planning

Taxes are an unpleasant fact of life when you sell collectibles, and the rules are different from those that apply to securities or real estate. If your collectibles will be sold at auction in another state or country, your tax planning also should include a careful look at taxes that may be imposed by that jurisdiction. Tax planning is a complex subject, and is beyond the scope of this article, however, there are some basic issues of which you should be aware. If your collectibles have appreciated in value, that appreciation may be considered long term capital gain. But the federal long term capital gain rate for collectibles is higher than for other capital assets, and California taxes capital gains at ordinary income rates. If the auction is going to be held in another state or country, you will need to consider whether that jurisdiction too will impose income, sales or other taxes. Alternatively, you may wish to consider foregoing any sale at the present time and minimizing or avoiding taxes by using one of a number of creative estate planning techniques to transfer some or all of the value to charities, family members or other objects of your affection.

Contacts:

If you would like to discuss the sale of collectibles at auction, attorneys in our Private Client Services Group are experts in tax planning, as well as negotiating and documenting consignment contracts. Please contact Gary P. Kaplan (415 677 6266 or gpkaplan@howardrice.com), Raymond P. Haas (415 677 6240 or rhaas@howardrice.com) or your regular Howard Rice attorney.