Michael Jackson’s Estate Beats IRS in Tax Court
Early this month, the U.S. Tax Court published a 271-page opinion that decided the fate of Estate of Michael Jackson v. Commissioner. In a battle between valuation experts that ended in the court discounting the IRS’s expert for committing perjury, the Court found the Jackson Estate’s valuations much more accurate than those of the IRS’s experts.
Before Michael Jackson’s untimely death in 2009, the King of Pop had fallen far from grace. Before Jackson’s death, he had stopped touring due to child sexual abuse allegations and was hemorrhaging cash. He had announced a new tour that had sold out, but no shows were held, and Jackson’s team struggled to find a sponsor for his show considering his tarnished image. In a last-ditch effort, Jackson had re-hired his advisors from his “Glory days”, but they were unable to put a plan in action since Jackson died shortly after. Jackson died deeply in debt, hadn’t made a new album, had not toured, and had not made any money from his likeness or image for years.
After Jackson’s death, his advisors took action, and were extremely successful, in both restoring the value of Jackson’s image and likeness and capitalizing on that restoration. To this day, Michael Jackson is still Forbes’ highest-earning dead celebrity. He is currently the 93rd most popular artist on Spotify, even though he passed away over 11 years ago. Based largely on the post-death success of the Estate’s managers, the IRS took issue with the valuation of three “intangible” items on the Estate Tax Return. These were Jackson’s image and likeness, the value of Jackson’s interest in Sony/ATV, which is a music publishing company, and the value of Jackson’s interest in Mijac, which owns rights from various musicians, including but not limited to Jackson.
Judge Mark Holmes made clear that the court was to focus on the nature of the estate tax as a tax on the privilege of passing on the property, not a tax on the privilege of receiving the property. With this significant decision, the court was able to discern the estate was in shambles when Jackson died, and it is only through the careful and shrewd guidance of the managers that it developed into the “estate” that the Commissioner sought to tax years later. This means that since the managers had built up Jackson’s three assets after he had passed, what the Commissioner should be taxing is the value those three assets had when Jackson was alive, which was much less than now. The court decided that Jackson’s image and likeness were valued at roughly $4.1 million. This was $1 million more than what the Estate argued in trial and about $3 million more than what the estate had reported, but this value was a shocking $400 million less than what the IRS had calculated. According to the court, the IRS included, and should not have, the “intangibleness” of likeness and image, which was already counted and agreed upon elsewhere. The IRS expert also included assets that were not foreseeable at the time of Jackson’s death. While the IRS valued Jackson’s interest in Sony/ATV at about $400 million, they did not account for Jackson squeezing it dry to the $0 that the estate managers had valued it. The court agreed with the estate managers that at Jackson’s time of death his interest in Sony/ATV was $0. Lastly, the Court decided that the “Mijac revenue” was closer to the IRS’s estimate than the estate manager’s estimate. The Court determined a value of $107 million for this asset. While the IRS wanted to add penalties to the Estate’s bill for understating the value of assets, the Tax Court ultimately rejected this premise.
Although the Tax Court’s decision significantly favors the taxpayer, there will be more cases where the value of a celebrity’s image and likeliness is in dispute in an Estate Tax Case. The IRS will learn from the mistakes that were made during this case to better prepare themselves in the future.
Though your options are virtually limitless when it comes to estate planning, deciding on the “who, what, when, and how” and executing this with the least amount paid in taxes, legal fees, and court costs possible can be a challenging and emotional affair to wrestle with alone. For more information, contact Talley LLP today.