In the long-running litigation between the estate of the late megastar Michael Jackson and the Internal Revenue Service, the U.S. Tax Court recently issued its opinion on the value of Jackson’s image and likeness, as well as the value of his interest in two music publishing assets. Overall, this much-anticipated decision is a major win for the Jackson estate. The court’s momentous decision includes an expansive analysis of the rivaling valuation testimony.
‘Tattered’ image. Michael Jackson died in 2009. The tax dispute was over the fair market value of three contested assets at Jackson’s death. As the court lays out in detail, although Jackson was once an admired popstar and celebrity, at the time of death, his reputation was “tattered” after various allegations of child sexual abuse and a criminal trial of which he was acquitted. “Acquittal did not rehabilitate his reputation,” the court noted. Financially, Jackson was strapped for cash, and various comeback efforts failed. “At the time of his death, each of the three assets that we have to value was distressed. His image and likeness was not producing any noticeable income,” the court noted. However, once the executors took charge (“rational profit maximizers,” the court calls them), they managed to undertake a major rebranding of Jackson and produce a sizable income for the estate.
After Jackson died, the estate hired Moss Adams to value Jackson’s image and likeness. Based on the income approach, Moss Adams concluded this asset was worth $2,105, which is the amount the estate reported on Form 706. The IRS issued a notice of deficiency in which it claimed the image and likeness were worth over $434.2 million. Considering value gaps related to other assets, the IRS claimed the estate had underpaid estate tax “by a shade more than $500 million.” Because some of the valuations were “so far off,” the IRS added nearly $200 million in penalties.
The estate petitioned for a review by the U.S. Tax Court. The estate retained four experts, including two to value Jackson’s image and likeness. One expert on international licensing and rights projected 10 years of post-death revenues from the exploitation of Jackson’s image and likeness under California law. The valuation expert used the projections as a basis for his income analysis and arrived at a value of just over $3 million. In contrast, as the court noted, the IRS “faced this chorus of experts with a soloist,” an expert in trademark, patent, and copyright valuations who valued all three big assets using different methods. Regarding Jackson’s image and likeness, this expert looked at “opportunities” a hypothetical buyer could reasonably foresee at Jackson’s death and determined a value of $161 million.
The court said the estate’s initial valuation, $2,105, for Jackson’s image and likeness “might seem absurd when one recalls Jackson’s fame,” but the valuation focused entirely on “the value of the Estate’s opportunity to license merchandise with Jackson’s image and likeness.” It did not value the cash flow from Jackson’s copyrights in his music, as a performer and composer. Before his death, Jackson earned close to nothing from his image and likeness, Moss Adams found. Even the estate was surprised that the image of “the King of Pop” was no more than the price of a “heavily used 20-year-old Honda Civic,” the court noted. But the estate used the valuation. The court found unpersuasive the IRS expert’s valuation, noting credibility problems, the failure to value the “asset that he should have,” and calculation errors.
The court said, while it did not agree with it in all respects, the valuation the estate’s trial appraisers offered was “much closer to reality.” The valuation expert gave “proper weight to the effect that the allegations had on Jackson’s ability to market his image-and-likeness rights during his lifetime up until his death.”
Using the estate experts’ 10-year projected revenue stream and adopting their calculated expenses to administer and rehabilitate Jackson’s image, the court arrived at a valuation of just under $4.2 million for this particular 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 will be available soon to subscribers of BVLaw.