By Richard Rubin
Michael Jackson's estate prevailed over the Internal Revenue
Service on several key issues in a closely watched court case, an
outcome that will push the estate's tax burden below the
government's initial assessment.
In a ruling issued Monday, U.S. Tax Court Judge Mark Holmes
found that the singer's name and likeness were worth $4 million
when he died in 2009, not the $161 million the government had
claimed. The IRS won on some other points about the value of other
Jackson assets, but will get far less than the hundreds of millions
of dollars in taxes and penalties it had sought from the
The government and the estate settled some issues, and the case
came down to the question of how to value three main assets: Mr.
Jackson's name and likeness and two entities tied to the music
The estate initially started with some lower values but by
Monday's decision, it had said those three assets were worth $5.3
million combined. The government had started with higher values and
an estate tax bill topping $500 million, but eventually concluded
those three assets were worth $481.9 million combined. Judge
Holmes, in his ruling, said they were worth $111.5 million. The
estate's actual tax bill will be determined later.
"This thoughtful ruling by the U.S. Tax Court is a huge,
unambiguous victory for Michael Jackson's children," John Branca
and John McClain, the estate's co-executors, said Monday. "While we
disagree with some portions of the decision, we believe it clearly
exposes how unreasonable the IRS valuation was and provides a path
forward to finally resolve this case in a fair and just
The IRS typically doesn't comment on litigation.
Part of the difficulty in the case, which took more than seven
years from its beginning to Monday's ruling, is that the law
requires that those values be measured as of the person's date of
death. For Mr. Jackson, that was near the nadir of his career,
after scandals and child-molestation accusations had tarnished his
reputation and limited his earning potential.
A central question in the case was this: Was it foreseeable that
the estate would -- as it since has done -- build a successful
business around Mr. Jackson's image? Or was that such a long shot
that the estate could plausibly claim, as it initially did, that
Mr. Jackson's name and likeness was worth $2,105? As Judge Holmes
put it, the estate was "valuing the image and likeness of one of
the best known celebrities in the world -- the King of Pop -- at
the price of a heavily used 20-year-old Honda Civic"?
"The value we put [on] them as of the day he died is, we
acknowledge, much less than their value much later under the
Estate's management," Judge Holmes wrote. "Even a rational and
undistressed hypothetical seller would have been hardpressed to
avoid fire-sale prices."
The image and likeness calculations were particularly difficult,
and tax lawyers had been eyeing the case as a guide on how to
handle other celebrities' estates. The questions have to do with
how much of a business could be built around that image, using
products such as film rights, a musical, a theme park or branded
"In the last 10 years of his life, he received almost no revenue
related to his image and likeness despite being one of the most
well-known persons on Earth," Judge Holmes wrote. "This is all to
say that any projection of revenue from the use of Jackson's image
and likeness... should be met with skepticism."
The second important asset was an entity that included Mr.
Jackson's stake in a music catalog with Beatles songs. That
back-and-forth turned on how valuable those songs were and on how
much control Mr. Jackson actually had.
Judge Holmes disputed the economic analysis from the
government's expert witness and, after subtracting liabilities that
the entity owed, found the asset to have no value.
The last asset was the one where the government fared best, the
value of a music catalog that owns copyrights along with some
income from Mr. Jackson's songwriting.
Figuring its value required determining how many unreleased
songs Mr. Jackson left behind and what they might be worth.
The ruling also determined just how large and how long-lasting
the predictable post-death increase in music-rights income would
be. That is, one of Mr. Jackson's assets at death was the income
that would inevitably flow into his estate from people downloading
his music when they heard the news.
Judge Holmes landed on a $107 million value for that third
asset, just $7 million below what the IRS had sought and more than
$100 million above what the estate said.
Judge Holmes also denied the government's request to collect
penalties from the estate for significant understatement of its
assets. Mr. Jackson's estate was represented by a team of
California tax lawyers. Initially, they had included Charles
Rettig, who is now the IRS commissioner.
The estate's income and assets go into a trust and Mr. Jackson's
mother, Katherine, is a lifetime beneficiary. The assets will
ultimately go to Mr. Jackson's three children and to charity.
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
May 03, 2021 18:04 ET (22:04 GMT)
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