Michael Jackson’s Estate, Valuation Battle of the Century

In May of this year the U.S. Tax Court issued a memorandum of opinion on the value of several assets included in the Estate of Michael Jackson (“Estate”) for federal estate tax purposes.[1] This opinion comes more than a decade after Jackson’s death in June of 2009 and provides some resolution (albeit subject to appeal) to an audit which concluded in May of 2013 and the initial petition which followed in July of 2013. While most readers might be hesitant to commit the time to read through the 271-page behemoth of a Tax Court opinion, it represents a significant win for taxpayers on the valuation front.

Findings of Fact

The opinion begins with an acknowledgement by the court that the “King of Pop” was famous from a very early age and has remained famous even after his death. However, as often seems the case, at least some portion of that fame became infamy during certain years due to allegations of sexual battery, seduction, and molestation of minors. The opinion states that “[the court] make[s] no particular judgment about what Jackson did or is alleged to have done, but [it] must decide how what he did and is alleged to have done affected the value of what he left behind.”

The opinion then presents the findings of fact which discuss, among other things, Jackson’s early life, the rise and fall of Jackson’s career, the sexual abuse allegations, Jackson’s eventual death, and several post-death events. Of particular note were several post-death transactions entered into by the Estate, and the resulting financial benefits received by the Estate. Additionally, Jackson established trusts to own certain business interests during his lifetime. Two of those, New Horizon Trust II, which held an interest in Sony/ATV Music Publishing, LLC and New Horizon Trust III, (together the “New Horizon Trusts”) which owned an interest in Mijac Music, were two of the main assets over which the parties were arguing. Beyond the value of the New Horizon Trusts, the value of Jackson’s image and likeness was the only asset of the Estate which the parties were unable to settle via negotiation in the lengthy pre-trial phase of the case.

Valuation and Why it Mattered

To understand why the parties were arguing over the value of the certain assets of the Estate, a fundamental understanding of the nature of the federal estate and gift tax is necessary. The Internal Revenue Code imposes a tax on the taxable estate of citizens and residents of the United States,[2] and defines “taxable estate” as “the value of the gross estate” less applicable deductions.[3] The term “gross estate” includes the value of all property, real or personal, tangible or intangible, wherever situated,” to the extent provided in sections 2033 through 2045,[4] and section 2033 includes the value “all property to the extent of the interest therein of the decedent at the time of death” in the decedent’s gross estate. For these purposes, the fair market value of property is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”[5]

Each individual taxpayer is provided with a lifetime exclusion amount, a specific dollar amount, currently adjusted for inflation, which they can give either during life or at death that will not be subject to the federal estate and gift tax.[6] As of 2021, the lifetime exclusion amount is $11.7 million, but in 2009 it was only $3.5 million. Essentially, given certain adjustments, the amount included in a decedent’s taxable estate in excess of the decedent’s remaining lifetime exclusion amount (taking account for gifts given during life) is subject to the federal estate tax, which was 45% in 2009 and is 40% in 2021.

While there are a multitude of different tax planning strategies that can be implemented to reduce estate and gift taxes, Jackson seemingly undertook very little, if any. Instead, he left a conventional Will in which a large portion of his estate passed to charities, with the majority of the remainder split between his mother and children. Assuming Jackson did not use any of his lifetime exclusion amount during life, the value of any assets included in his estate in excess of $3.5 million would have been subject to the 45% federal estate tax.[7] Thus, the valuation battle began.

Valuation Battle

As a 90’s baby, the thought of an epic battle brings to mind images such as Batman, He-Man, and other larger-than-life heroes clashing against the forces of evil, though I doubt any of characters from my childhood cartoons ever took part in a battle of comparable financial proportions. As stated above, the parties had settled on most of the assets of the Estate with Jackson’s image and likeness and the interests in the New Horizon Trusts being the only remaining values to be determined. Of course, the Estate argued that these assets had a low value (first on the estate tax return, then on brief for trial), and the IRS argued that they had a much higher value (first on the notice of deficiency issued after the audit, then on brief for trial). The court provided a summary of the parties’ positions as follows:

Reported on Estate Return Notice of Deficiency Estate on Brief IRS on Brief
Image/Likeness $2,105 $434,264,000 $3,078,000 $161,307,045
NHT II (Sony/ATV) $0 $469,005,086 $0 $206,295,934
NHT III (Mijac Music) $2,207,351 $60,685,944 $2,267,316 $114,263,615

The real battle in circumstances such as these is at trial, where each side retains experts to provide testimony as to why their valuation is more credible and attempts to undermine the testimony and methodology of the opposing experts. Undermine they did. The Estate retained four experts for the trial, while the IRS only brought one, Mr. Weston Anson. One might think, when dealing with as many zeroes as were relevant in this case, wouldn’t the IRS want their position to rely on more than one man’s testimony? Especially when the other side has the resources to hire top-notch litigators to question his credibility and attack his methods. It is not clear why the IRS retained only Anson, but I am sure they regretted it.

Anson perjured himself not once, not twice, but three separate times. First when he was asked about the effect on himself and his firm if the IRS prevailed in the case. He responded, “I have no idea. I’ve never worked for the Internal Revenue Service before.” Later when asked whether he or his firm had previously been retained by the IRS to write an intellectual property valuation report in Whitney Houston’s estate-tax case, Anson replied: “No. Absolutely not.” Both of these statements were, in fact, lies. Approximately two years before testifying at the Jackson trial, the IRS had retained Anson to write a valuation report for Whitney Houston’s estate-tax case. It was only after a recess and advice from the IRS’s counsel that Anson admitted to this.

Anson also testified that “neither he nor his firm ever advertised to promote business.” This was also a lie. While the trial was in progress, Anson’s firm praised his role in an email blast describing Anson as the “expert of the century” in the “tax trial of the century” testifying on behalf of the IRS in its case against the Estate. Given these statements. The Estate moved to have all of Anson’s testimony stricken, including his expert reports, on the grounds that such were tainted by perjury. The court found this outcome “too severe” and denied the motion. Instead, the court opted to discount the credibility and weight it gave the Anson’s opinions. The fact that Anson was the only expert for the IRS was likely a factor in this decision, since without Anson and his testimony, the IRS would have been left with very little to justify their own values and counter those presented by the Estate. One has to wonder, if one of the Estate’s experts had been the one to perjure himself multiple times, would the court have held similarly?

Court’s Findings on Values

The portions of the opinion related to the valuation methodologies used by the parties and their influence on the court’s determinations of values are not only extremely technical but also require an understanding of certain aspects of intellectual property law. A discussion of such is beyond the scope of this article, however I certainly appreciated the court’s succinct explanation on the concepts of composer, performer, and rights of publicity when I was reading the in-depth discussion on the valuation methodologies. Some of the issues imbedded in the valuations and therefore addressed by the court were tax affecting, post-mortem events, synergy among assets, and the application of California intellectual property rights. The court included another helpful summary of the parties’ positions on brief as well as the court’s findings for the values as follows:

 

Estate on Brief IRS on Brief Tax Court
Image/Likeness $3,078,000 $161,307,045 $4,153,912
NHT II (Sony/ATV) $0 $206,295,934 $0
NHT III (Mijac Music) $2,267,316 $114,263,615 $107,313,561

The numbers speak for themselves here. The court clearly found the Estate’s arguments and methodologies persuasive on the first two assets but was persuaded more by the IRS on the third asset. The total difference between the values reported by the Estate and found by the court was just north of $105 million. This difference in values led to the final issue before the court, whether the Estate was liable for penalties.

Penalties

The IRS argued that the Estate was liable for several section 6662(a) penalties: gross-valuation misstatement under section 6662(h), substantial-valuation misstatement under section 6662(g), and negligence or disregard of the rules under section 6662(c). Given that the court agreed with the Estate’s value for one of the New Horizon Trusts, it ruled that no penalties would apply to any underpayment for its valuation. With regard to the other two assets, the Estate needed to show it had reasonable cause and good faith for the values stated on the return.[8] This showing is determined on a case-by-case basis after considering all the pertinent facts and circumstances, and the most important factor is the taxpayer’s efforts to assess its liability.[9] Having an appraisal of the asset in question is not a per se showing of reasonable cause and good faith,[10] although I personally have no idea how a non-valuation expert is supposed to know better than the valuation or accounting firm hired to deliver such an opinion.

Fortunately for the Estate, the court found that given the downturns in Jackson’s life and career in the last 10 years of his lifetime, the appraisal provided by a reputable accounting firm “wasn’t that farfetched.” Therefore, even though the court disagreed with the values provided in the appraisals, it held that the Estate acted reasonably and in good faith in relying on the appraisals. Accordingly, the court held that no penalties applied to any of the assets.

Conclusion

Michael Jackson’s career, like those of many celebrities, was heavily influenced by public opinion. Due to the severity of the allegations against him, Jackson’s career suffered more than most, to the point where he was unable to win sponsoring and merchandising deals during the last years of his life. Additionally, even though Jackson’s revenues had significantly decreased, his spending did not. Thus, most of his assets were significantly encumbered by outstanding liabilities. Add in the fact that the only expert presented by the IRS at trail perjured himself three separate times, and one can begin to see how the Estate came out on top in this case. The Estate was also fortunate that the Court concluded its reliance on the appraisal was reasonable and in good faith, since apparently taxpayers are supposed to know better than valuation experts when it comes to appraising assets.

[1] Estate of Jackson v. Comm’r, T.C. Memo. 2021-48.

[2] IRC § 2001(a).

[3] IRC § 2051.

[4] IRC § 2031(a).

[5] Treas. Reg. § 20.2031-1(b).

[6] IRC § 2010.

[7] Important to note here is the fact that the estate would have been eligible for a charitable deduction related to the portion of Jackson’s taxable estate passing to the charities.

[8] IRC § 6664(c).

[9] Treas. Reg. § 1.6664-4(b)(1).

[10] Id.