The estate of the “King of Pop”, the late Michael Jackson, was part of one of the most anticipated United States Tax Court decisions in recent memory. In a 271 page opinion, Estate of Michael Jackson v. Commissioner, T.C. Memo 2021-48, the court sided with Jackson’s estate, offering a big blow to the IRS. The two main features at play in the case were estate tax principles and general valuation. In sum, the court found that the valuations of Jackson’s estate were far more accurate than that of the IRS valuation experts. The case was notable for a number of reasons.
The opinion was of great interest to a variety of parties, both those involved in the case and those on the outside. Due to Jackson’s indisputable high profile, everyone from the parties of the dispute to the fans and from valuation professionals to the estate advisory community were laser-focused on this long-awaited opinion. Plus, the large amount of money at stake paired with the lengthy period of time between Jackson’s passing and the opinion made for an all-time high of anticipation.
In addition to the above factors, the fact that the parties valued certain assets so differently raised the eyebrows of many and further led to piqued interest. For example, the court valued Jackson’s name and likeness at $4 million, a stark contrast from the $61 million estimate given by the IRS’s outside tax expert. This was one of three valuation issues that the IRS was looking at – the “intangible” items on the Estate Tax Return included:
- Michael Jackson’s name and likeness
- Jackson’s interest in music publishing company Sony/ATV
- Jackson’s interest in musicians copyrights ownership, Mijac
When the IRS audit was complete the Commissioner of Internal Revenue’s valuation expert had valued the above three items at $481,866,954. Jackson’s estate valuation experts, on the other hand, had valued the above three items at $5,345,316. In the end, the court concluded that the fair market value for the three assets at hand came to a total of $111,467,473. So, where did the vast difference stem from? How could valuation experts from both sides be so contrasting?
When Jackson died his estate was a mess. As such, Judge Mark Holmes noted that the court “focuses on the nature of the estate tax as a tac on the privilege of passing on the property, not a tax on the privilege of receiving property”. This is a critical distinction because meticulous and smart management played an enormous role in developing the estate to the point in which the Commissioner sought to tax many years later. To conclude, the managers were able to essentially transform Jackson’s estate after his death. However, as far as the court is concerned, they were focusing exclusively on the value of what Jackson had to pass on at the time of this death. This number is drastically different than what his beneficiaries would stand to receive as a result of management adding value to his estate after Jackson’s death.
The ruling was extremely significant for a number of reasons and the first of its kind in regards to valuing a celebrity’s image and likeness after death. In this opinion the Tax Court heavily favored the taxpayer. Valuing assets related to intellectual property is no easy feat. This case provided much insight into how valuation experts can approach this type of complicated situation in the future. From relying on historical data versus management projections to considering pass-through entity status, Estate of Michael Jackson v. Commissioner, T.C. Memo 2021-48 will be referenced by valuation experts for many years to come.