In the long-running litigation between the estate of the late megastar Michael Jackson and the Internal Revenue Service, the U.S. Tax Court finally issued its opinion on the value of Jackson’s name and likeness, as well as the value of his interest in two music publishing assets. Overall, this much-anticipated decision is a major win for the Jackson estate.
From the time he was a child Michael Jackson was famous, and there were times in his life, testified his executor, when he was the most famous person in the world. There were certainly years when he was the most well-known popular-music star, and even after his death, there have been years when he was the world's highest-earning entertainer.
But there were also many years when he was more famous for his unusual behavior and not his unusual talent. And there were some years where his fame was turned infamous by serious accusations of the most noisome acts. We make no particular judgment about what Jackson did or is alleged to have done, but we must decide how what he did and is alleged to have done affected the value of what he left behind.
His Estate and the Commissioner agreed on the value of many of his assets, but continue to dispute the values of three intangible ones:
Jackson's image and likeness;
his interest in New Horizon Trust II, through which he held an interest in Sony/ATV Music Publishing, LLC; and
his interest in New Horizon Trust III, which contained Mijac Music, a music-publishing catalog that owned the copyrights to compositions that Jackson wrote or co-wrote, as well as compositions by other songwriters.
Facts of the Case
After Jackson died the Estate hired the accounting firm Crowe Horwath to prepare its return. Their work began with a long list of labor-intensive chores, as Jackson's various assets needed to be inventoried, photographed, valued, and insured. The chores became more arduous when they discovered that Jackson's Tohme-led team of advisers had kept no contemporaneous books and records in the last three years of his life. Kane, Jackson's last business manager, worked as a liaison between the Estate and the Crowe Horwath team to prepare the return, and recommended appraisers to value Jackson's interests in Sony/ATV and Mijac, as well as his image and likeness.
The Estate retained Moss Adams, a large accounting and consulting firm, to value Jackson's image and likeness and his interest in Mijac. Relying entirely on the income approach to valuation, Moss Adams valued Jackson's image and likeness at $2,105 and Mijac at $70,860,000.
To value Jackson's ownership interest in Sony/ATV, the Estate selected the Salter Group, an independent financial and strategic advisory firm that specializes in valuations. The Salter Group also chose to use only the income method, which led it to value Jackson's ownership interest in Sony/ATV at $0.
Using these valuations, the Estate, on its 2009 Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, reported the value of:
Jackson's image and likeness at $2,105;
NHT II, which held Sony/ATV, at $0; and
NHT III, which held Mijac, at $2,207,351.
The Estate also reported Jackson's various other assets—the most significant among them including his Hayvenhurst home; MJJ Productions, Inc.; MJJ Ventures, Inc.; and his master recordings. Jackson was, when he died, the sole shareholder of MJJ Productions and MJJ Ventures. MJJ Productions collected Jackson's mechanical royalties as a recording artist under an agreement with Sony Music, Inc., while MJJ Ventures collected Jackson's share of joint venture income under an agreement with Sony for the exploitation of Jackson's master recordings.
The IRS Audit
The Commissioner audited the Estate's tax return and in May 2013 issued a notice of deficiency that adjusted the Estate's reported values. We summarize it here:
Item Adjustment
Hayvenhurst real estate $1,425,000
MJJ Ventures, Inc. 67,393,780
Share of artist mechanical rights
under Jackson 5 master recordings,
and master recordings 34,299,095
Miscellaneous property 48,603,827
Image and likeness 434,261,895
New Horizon Trust II 469,005,086
New Horizon Trust III 58,478,593
Debts 12,252,591
Limitations to Schs. J & K (713,436)
Total 1,125,006,431
This adjusted valuation led the Commissioner to conclude that the Estate had underpaid Jackson's estate tax by a shade more than $500 million. The Commissioner also determined that some of the valuations were so far off that he tacked on penalties of nearly $200 million. The Estate timely petitioned. During the trial, neither the Commissioner nor the Estate entered any evidence into the record to show that the initial determination of these penalties was personally approved in writing by the immediate supervisor of the individual making the determination. The Commissioner moved after trial to reopen the record with new evidence to try to show that the initial determination of penalties was personally approved in writing by the immediate supervisor of the individual making the determination. The Court denied that motion.
The IRS's Valuation Expert's opinion of value are the following:
Jackson's image and likeness at $161 million;
NHT II, which held Sony/ATV, at $206 million; and
NHT III, which held Mijac, at $114 million.
In the end, here are the tax court's decisions:
Asset Estate Commissioner Tax Court
Jackson's image
and likeness $3,078,000 $161,307,045 4,153,912
NHT II -0- 206,295,934 -0-
NHT III 2,267,316 114,263,615 107,313,561The adjusted audited value of Michael Jackson's estate is $275 million (rounded) as described below:
Item Adjustment
Hayvenhurst real estate $1,425,000
MJJ Ventures, Inc. 67,393,780
Share of artist mechanical rights
under Jackson 5 master recordings,
and master recordings 34,299,095
Miscellaneous property 48,603,827
Image and likeness 4,153,912
New Horizon Trust II -0-
New Horizon Trust III 107,313,561
Debts 12,252,591
Limitations to Schs. J & K (713,436)
Total $274,728,330
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