September 1, 2021
Imposing an estate or inheritance tax at death is not very difficult when the assets consist of cash and marketable securities. Those values are readily obtained. But when an estate includes intangible assets, the process can become very complex indeed. One of the best illustrations of this phenomenon may be the estate of Michael Jackson. The Tax Court has rendered its decision, nearly 12 years after Jackson’s death in 2009.
There were three key assets for which the estate and the IRS could not find an agreement as to value, requiring the services of the Tax Court. First there is the commercial value of Jackson’s image and likeness. The estate valued it at only $2,105 on the estate tax return. The IRS’ expert pegged the value at some $161 million! At trial, the estate conceded that the right to use Jackson’s image was closer to $3.1 million in value.
Given the hundreds of millions of dollars earned by the estate since Jackson’s death, even that figure might seem laughably low. However, the estate tax is imposed on the value of the asset at the moment of death, and events after death are not taken into account. Jackson’s reputation was at a low point before he died.
The Tax Court judge criticized the IRS’ approach to valuing this asset. “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,” he wrote. The judge decided Jackson’s image was worth $4.2 million at death.
Jackson owned a 50% interest in a joint music venture with Sony. The estate reported that asset as worthless, because the venture’s liabilities exceeded its assets. The IRS asserted it was worth more than $206 million. But the IRS was wrong, the judge ruled, because its expert treated the venture as a music cat- alog when it was in fact an operating business. The estate was correct, this asset had no value.
Finally, a trust that owned the copyrights to Jackson’s music had to be valued. The estate had valued the trust at $2.3 million, while the IRS put it at $114.3 million. The Tax Court judge concluded it was worth $107.3 million. The IRS had initially asked for a penal- ty tax on the substantial valuation shortfalls on the estate tax return, which could have run to hundreds of millions of dollars. Even though the Jackson estate won most of its arguments, there remained a huge gulf between what the estate tax return reported and what the Tax Court finally ruled as correct values. Nevertheless, the Court held that no penalty was appropriate. In this incredibly complicated case, the estate had relied upon competent experts, was not negligent, and had acted in good faith.