Valuation Conclusions for Michael Jackson’s Estate Differ by Over a Billion Dollars

||Valuation Conclusions for Michael Jackson’s Estate Differ by Over a Billion Dollars

Valuation Conclusions for Michael Jackson’s Estate Differ by Over a Billion Dollars

February 2014

The IRS is taking serious issue with Michael Jackson’s estate over the value of various assets upon which taxes are due.  According to a recent article in the Los Angeles Times (“LAT”), there is over a billion dollar discrepancy between the value reported by his estate after his 2009 death and the amount concluded by the IRS.  The major difference’s derive from the value of various intangibles, which require expert opinion.

LAT reports the following items as among the major differences:

Value Per Jackson Estate

Value Per IRS

Jackson’s Likeness

$2,105

$434,264,000

Trust with Beatles and Jackson’s Songs

$0

$469,000,000

Share of Jackson 5 Master Recordings

$11,193,000

$45,500,000

Separate Trust Assets

$2,200,000

$60,600,000

MJJ Ventures Inc

$13,730,000

$81,130,000

Automobiles

$91,600

$250,000

Other Tangible Personal Property

$0

$47,467,000

 

The IRS has asserted that these tremendous differences in value qualify for a rarely assessed “gross valuation misstatement penalty”, which enables the IRS to obtain a 40% penalty rate (versus the standard 20%).  As a result, the IRS is demanding $197 million in penalties beyond the claimed $505 million tax bill.

On its face, suggesting a Trust containing Beatles’ and Jackson’s songs is valued at zero seems ridiculous.  However this zero valuation may be impacted by theories that Jackson had attempted (apparently unsuccessfully according to the IRS) to transfer this Trust to his children or saddled the music catalog with substantial debt ($320 million according to a CPA who testified during his recent wrongful death trial).

There are a variety of factors which can impact the value of the intangible items listed above.  Certainly, the value of Jackson’s image was damaged by disturbing allegations regarding his criminal behavior.  However, one cannot ignore that in October 2013, Forbes magazine reported that Jackson was the highest-paid celebrity that year, earning $160 million (derived mainly from two Cirque du Soleil shows based on his music).

An appraisal of publicity rights usually is based on the discounted cash flow of what is expected in the future.  However, the cash flows are often difficult to estimate because they are (i) potentially long lasting, and (ii) subject to changing social whims. For cultural icons such as Michael Jackson, the licensing potential clearly does not end with his death.  In some cases, death actually causes a bump in an entertainer’s popularity and the related licensing of their image and likeness.

Future technologies can also have a big impact on the estimates of future value.  Licensing of content showing dead celebrities is not limited to reproductions of existing images and recordings. As future technology advances, the postmortem right to publicity is likely to have an even greater value.  Technology that allows mixing new performances with existing (copyrighted) material of deceased celebrities already has been successful (for example, the movie Forrest Gump and Tupac’s 2012 posthumus Coachella performance).  In the future, new techniques will expand to include the possibility of recreating dead celebrities in completely new productions.

Licensing rates vary based on both the star’s popularity and the particular item (e.g., photographs, clothing, or reproductions) involved. Preferably, future licensing rates are estimated based on past results.  For established celebrities, an average royalty rate is often around 10 percent.

Some entertainers have a long licensing track record after death (e.g., Marilyn Monroe, Elvis Presley), while others do not.  Accordingly, the discount rate used to measure future activities can vary considerably between entertainers.  The appraiser’s decision on this key point involves substantial judgment.

Fulcrum Inquiry values intellectual property, with substantial experience in the entertainment industry.

2018-12-20T10:10:46+00:00Valuation and Appraisal|

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