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 estate.

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 business.

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 manner."

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 merchandise.

"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


(END) Dow Jones Newswires

May 03, 2021 18:04 ET (22:04 GMT)

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