Tainted image and tax affecting figure into King of Pop’s estate valuation

BVWireIssue #173-4
February 22, 2017

During the trial involving the Michael Jackson estate (see prior coverage), valuation expert Jay E. Fishman (Financial Research Associates), testifying for the Jackson estate, said that allegations of child molestation were so heinous that his name and likeness could only be valued at $3 million at the time of his death. The IRS contends the value should be $161 million. Fishman points out that for years prior to his death Jackson generated very little income. The taints such as what Jackson experienced “are nearly impossible to overcome,” Fishman said, who was quoted in an article on Law360, adding: “I call it like being in a nuclear winter.”

Early spring: Of course, business valuation is about what’s known or knowable as of the valuation date and you generally cannot consider subsequent events. As it turned out, in the four months after Jackson’s death, his estate raked in an estimated $90 million, which propelled him onto the Forbes list of Top-Earning Dead Celebrities for 2009—the year he died. And he’s earned nine figures in every full year since his death (for 2016, he’s in the No. 1 spot, earning $825 million). We point out that not all of this revenue is from his name and likeness, as his estate held other income-producing assets.

Could any of this have been known or knowable? How do you show that a scandal destroys a celebrity’s name value? Did the DCF projections reflect the risk or was there a big “scandal discount” layered in? How did the IRS estimate the value? Hopefully, the court proceedings will shed some light on these—and other—intriguing questions.

The $3 million is a revised valuation from the estate’s original estimate of $2,105. The IRS has also revised its estimate on the name and likeness value, lowering it to $161 million from $434 million. That’s still a big difference ($158 million) but a lot less than it was before.

Tax affecting: Earlier, U.S. Tax Court Judge Mark Holmes denied a motion by the IRS to exclude the report and testimony of valuation expert Nancy Fannon (Meyers, Harrison & Pia Valuation and Litigation Support). The Jackson estate retained Fannon to explain how and why taxes should be taken into account in a DCF analysis of a business interest in a pass-through entity (PTE). Among other assets in dispute, Jackson owned a 50% interest in an LLC (Sony/ATV) that controlled song copyrights, which is being valued using the DCF method. Fannon submitted a report titled “Treatment of Tax Issues for Valuation of Pass-Through Interests.” The IRS has had a long-standing resistance to tax affecting the income stream of PTEs to account for the difference between the public market data (from which the cost of capital is derived) and the subject PTE (to which it is applied).

Judge Holmes allowed Fannon’s report and testimony, saying in his order that “whether and how to take tax effects into account in that valuation will likely be crucial to the final numbers.”

Fannon is co-author (with Keith Sellers) of Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle. Fishman is co-author (with Shannon Pratt and Jim Hitchner) of A Consensus View: Q&A Guide to Business Valuation.

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