IRS vs. The Estate of Michael Jackson
For many reasons, the Michael Jackson estate tax case will affect us all. First, it is one of the first Intellectual Property tax cases dealing with revenue streams of virtual people; second, when someone dies such as a Michael Jackson, do you use actual value based upon past experience as the value or can the IRS comeback and give it a higher valuation if the assumptions made by the estate were wrong; and third, what standards must the IRS and estate use for their expert who values the estate? All three were important issues in the above case. With social media presence increasing exponentially, these issues may affect the estates of many of us.
Twelve years after Michael Jackson died we finally have the ruling on valuing his estate. When Michael Jackson died he was trying to make a comeback tour because he was practically insolvent. The executor of his estate is a very talented entertainment lawyer and financial advisor.
The estate has earned over $2 billion since Michael’s death. The IRS has been battling the estate about the value of Michael Jackson’s estate at the time of his death. Originally when Michael died, the estate valued his net worth at around $5 million, and the IRS valued it around $482 million. The big items were the worth of Michael Jackson’s likeness, royalties from Michael’s songs and other artists that Michael had acquired while he was alive, and a production company that included the Apple Record Label (Beetle songs) Michael owned jointly with Sony Records.
At the time of Michael’s death, his reputation was in the dumps due to accusations that he preyed upon children. Michael’s estate was deeply in debt something more than a quarter billion and growing, so a trust was set up to hold his interest in the Apple Record Label royalties and the Mijac Music production company he owned. A different trust owned Michael’s own songs and some other artists’ songs.
The entire case hinged on whether the IRS could use actual earnings to value Michael’s estate ($2 billion in revenues and back into a valuation) while the estate only had 9 months to determine what value Michael’s estate was worth at the time of his death. In 2009, when Michael died, we wrote about the important precedent of this case, regarding Intellectual Property and the increase in the value of likenesses. With the difficulty of guessing future income streams, we hoped that the royalty stream when Michael died would be used and that the valuation on all the assets except for Mijac would be low. Since Mijac was producing healthy revenues, that seemed to be the one asset that had the most value and least debt (Michael had recently sold a half interest in it to Sony, which wiped out a lot of debt on that asset).
By the time the Estate and the IRS went to court, the estate valued Michael’s likeness at $3 million, the rights to Michael’s songs at less than the debt collateralized to them, and Mijac, which he owned jointly with Sony records, at around $2.3 million, for a total estate value of about $5 million.
The IRS valued Michael’s likeness at $161 million (after all, when he died his likeness was everywhere), the collateralized songs at $206 million, and Michael’s interest in Mijac at $114 million—for a total value of $482 million. The IRS also added penalties that amounted to almost 50% more, for abusive under-reporting. Michael’s estate had to put up a bond of approximately $200 million in order to dispute the IRS value and litigate the IRS in tax court.
The judge valued Michael’s likeness at approximately $4.2 million. He agreed that Michael’s songs were saddled with so much debt that their value was less than the debt the songs collateralized. The judge found that Michael’s interest in Mijac was worth $107 million, for a total valuation of about $111 million. The abusive penalties assessed by the IRS for undervaluing the estate were dismissed.
Since the estate has a bond in excess of $200 million and the entire tax prior to interest is about $50 million, the IRS is certain to receive its tax without forcing the estate to sell off assets. There is a good chance that the IRS will appeal the decision and litigate further. However, from everything we have read, the analysis is fair and comprehensible. In the future, revenue streams of celebrities (even notorious ones) may be valued greater, due to the experience of the Michael Jackson estate.
In the litigation the Estate valued the likeness and image at $3,078,000. The IRS had likeness and image at $161,307,045. Judge Holmes went with $4,153,912.
The estate, in Tax Court, argued that NHT II (which held his 50% ownership interest in Sony/ATV) was worthless because of the debt it was buried under. Although Judge Holmes had a different value for the collection of rights to music by both Jackson and other artists, he agreed with the estate that there was not enough value to overcome the debt. IRS had NHT II at $206,295,934.
The estate valued NHT III (which held his ownership interest in Mijac Music, jointly owned with Sony) at $2,267,316. The IRS had NHT III at $114,263,615, Judge Holmes leaned toward the IRS on that one coming in at $107,313,561.
Round numbers going into trial the disputed assets were valued at $5 million by the Estate and $482 million by the IRS. Judge Holmes at $111 million leaned toward the Estate, but it was not a real blowout. The top estate tax rate in 2009 was 45% so the final check the Estate writes will probably still be, as we say, a number.
Opinion of Judge Mark V. Holmes