In 2009, singer, songwriter, and entertainer Michael Jackson passed away, leaving behind a sizable estate and some major questions from the IRS. In order to answer those questions, the US Tax Court began what has since been called the “tax trial of the century”. In this article, we’re going to review the development and eventual resolution of the Estate of Michael J. Jackson v. Commissioner of Internal Revenue.
Let’s get started!
Foundation of the Case
After Jackson’s death, the executors of his estate filed a tax return reporting the value of his property. The IRS promptly challenged the reported value of certain assets, while reaching an agreement about others prior to trial. The three primary challenged assets were:
- Jackson’s image and likeness
- His 50% interest in Sony/ATV, a music catalog and music publishing business
- His interest in Mijac Music, which owned musical compositions from a variety of artists
The executors of the estate valued those assets at approximately $5.3 million, whereas the IRS claimed such assets were worth more than $480 million.
The Legal Questions
One of the core issues in this case is a question of fair market value. For tax purposes, fair market value is defined as “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 sell and both having reasonable knowledge of relevant facts”.
Given the intangible nature of assets like Jackson’s likeness, the challenged assets didn’t have an obvious market value. To resolve this problem, both parties retained professional appraisers. Tax court judges are not bound by any particular expert opinion and are free to accept or reject an expert’s opinion based on the Court’s own judgment. In this case, Judge Holmes determined the unique assets would be evaluated based on three factors: income, market, and cost.
The income approach values an asset by projecting how much revenue will be produced in the future and determining the present value of the projected revenue.
The market approach values an asset by comparing it to the prices at which similar assets have changed hands in arms-length transactions close in time to the date of death.
The cost approach values an asset by computing the cost of recreating it.
Evaluating the Decision
Following expert testimony, the court undertook a thorough analysis of the valuations and performed its own as well. Ultimately, Judge Holmes found that the actual value of the challenged assets was far closer to the Estate reported values than those offered by the IRS.
In part, this difference in valuation is due to the fact that the court considered “prominent factors affecting the value of the assets were Jackson’s dwindling celebrity status as a result of, among other things, child molestation charges, and the crushing debt against his interest in Sony/ATV, which effectively wiped out its value.”
|Asset||Estate Valuation||IRS Valuation||Tax Court|
|Jackson’s image and likeness||$3,078,000||$161,307,045||$4,153,192|
|Sony/ATV interest||– 0 –||$206,295,934||– 0 –|
Thanks for reading! We hope this spotlight has illustrated the important and fascinating nature of this tax trial. If you enjoyed this article, let us know on social media!
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