When Michael Jackson died, his image and likeness was besmirched, and yet, once competent executors took charge, they were able to make a lot of money for the estate in the immediate post-death years. The issue was to what extent this subsequent development could factor into the image-and-likeness valuation. In explaining his high valuation, the IRS’ expert offered a theory of “foreseeable opportunities” that the U.S. Tax Court found unpersuasive.
‘Reasonably foreseeable’: Michael Jackson died in 2009. The litigation in the U.S. Tax Court was over the fair market value of three contested assets at Jackson’s death, including the value of Jackson’s name and likeness. At trial, the estate established that, although Jackson was once an admired musician and superstar, at the time of death, his reputation was compromised in the wake of allegations of child sexual abuse and a criminal trial of which he was acquitted. He accumulated serious debt and was at risk of bankruptcy.
The estate’s image-and-likeness experts found this asset was worth about $3 million. In contrast, the IRS’ expert, also using a discounted cash flow analysis, valued this asset at over $161 million. The court said the expert took a “wildly different approach,” which, among other things, resulted in much higher revenue projections. Rather than using income Jackson had earned before his death from his image and likeness as a starting point, the IRS’ expert considered “foreseeable opportunities,” i.e., opportunities that the expert believed were reasonably expected at the time of death and would create revenue attributable to Jackson’s image and likeness. They included themed attractions and products, branded merchandise, a Cirque de Soleil show, a film, and a Broadway musical.
The court rejected the analysis “as fantasy.” Among its flaws was the inclusion of unforeseeable events. The valuation date, the court noted throughout its long opinion, was the time of Jackson’s death. “Foreseeability can’t be subject to hindsight,” the court said. However, a court may consider subsequent events “to the extent that they were reasonably foreseeable at the decedent’s death.” The court found here the opportunities the IRS’ expert designated as foreseeable “bear some considerable resemblance to deals the Estate, under its competent management, did do in the years after Jackson’s died.” Although the IRS expert “carefully said he didn’t rely on events after Jackson’s death in his valuation, he did look at them to assess the reasonableness of his projections,” the court noted.
In reviewing the claimed “foreseeable opportunities,” the court found four of the five revenue streams included in the IRS valuation were unforeseeable at the time of death. The court said the same problem “lurk[ed] everywhere in our analysis of the value of Jackson’s image and likeness—his poor reputation other than as an entertainer.” In the last 10 years of his life, Jackson received almost no revenue from his image and likeness “despite being one of the most well-known persons on Earth.” According to the court: “Any projection that finds a torrent of revenue, and not just a trickle, from such a man’s image and likeness—especially one who in the last two years of his life was so unpopular he did not even have a Q score—is simply not reasonable.” The IRS’ expert ignored “this rather severe limitation.”
The court assigned a value of approximately $4 million to this asset.
A digest of Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-48 (May 3, 2021), as well as the court’s opinion are available at BVLaw.