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IRS Overvalued Michael Jackson Estate by $370M, Tax Court Rules (1)

May 3, 2021, 8:13 PM; Updated: May 3, 2021, 10:30 PM

The IRS overvalued the worth of Michael Jackson’s estate by hundreds of millions of dollars, the U.S. Tax Court held Monday in a ruling on the estate’s yearslong tax fight.

Tax Court Judge Mark V. Holmes in a 271-page opinion found that the pop star’s image and likeness and other assets were worth about $111 million—less than a fourth of the $481 million the IRS determined. Jackson’s publishing rights to songs by various other artists were also significantly overvalued by the agency, the court held.

“And just as the grave will swallow Jackson’s fame, time will erode the Estate’s income. It resurrected and then sold what became its most valuable asset to Sony before trial,” Holmes wrote. “The value of what it has left, no matter how well managed, will now dwindle as Jackson’s copyrights expire and his image and likeness shuffle first into irrelevance and then into the public domain.”

The ruling means the ultimate tax bill for Jackson’s estate is lower than what the IRS determined. The ruling also could significantly impact how hard-to-value assets of entertainment figures get taxed when they die.

In valuing Jackson’s assets, the court said it needed to look at how much each asset was worth as if “in the decedent’s hands at the time of its transfer by death.”

“He went deeply into debt to keep his life as it had been. Those debts increased; the interest on them rose; bankruptcy was a foreseeable outcome. These troubles affect our factfinding,” Holmes wrote.

Jackson’s estate sued the IRS in 2013 over a tax deficiency notice, arguing the agency made several errors in how it was valuing the estate. By the time of a 2017 trial, the valuation disagreements had zeroed in on the value of Jackson’s name and likeness and of two trusts that included property interests in the right to publish Jackson’s music, the Beatles catalog, and songs by music stars including Bob Dylan and Taylor Swift, according to a court document.

The Tax Court said the IRS’s projection of Jackson’s future revenue streams—one of the factors used in the valuations—were unforeseeable due to the artist’s reputation as a person, especially in the last two years before his death. Weston Anson, chairman of CONSOR Intellectual Asset Management, an intellectual-property consulting firm working with the IRS, included themed attractions and products, branded merchandise, and a Circque du Soleil show among “foreseeable opportunities” at the time of Jackson’s death, which inflated the value of Jackson’s assets.

“Anson simply glossed over Jackson’s having been accused multiple times of the most heinous acts in his analysis of each supposedly foreseeable revenue stream,” Holmes wrote.

The Tax Court found that the estate wasn’t liable for any of the penalties levied against it.

Steven Toscher, managing principal of Hochman Salkin Toscher Perez P.C., who represented Jackson’s estate, said that the decision was a vindication of the estate’s position on the valuation of Jackson’s assets, noting the government’s “unreliable and unpersuasive” analysis.

“The Estate reasonably relied on its experts in good faith rejecting the assertion of any penalties,” said Toscher in an email.

The IRS didn’t immediately respond to requests for comment.

The case is Estate of Jackson v. Commissioner, T.C., No. 17152-13, 5/3/21.

—With assistance from Aysha Bagchi.

(Updates with additional reporting throughout, starting in the third paragraph.)

To contact the reporter on this story: Jeffery Leon in Washington at jleon@bloombergindustry.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com; Sony Kassam at skassam1@bloombergtax.com

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