Tax Trial of the Century…

Tax Trial of the Century[1]

Which does not belong: Bad, Thriller, Moonwalk, Tax Court.  Actually it is not a fair question because they all have one thing in common, Michael Jackson.  The last one being the Estate of Michael J. Jackson v. Commissioner of Internal Revenue[2].

Michael Jackson died in June 2009. The Executors of his Estate filed an estate tax return reporting the value of his property, which included Jackson’s image and likeness, his 50% interest in Sony/ATV, a music catalog and music publishing business,[3] and his interest in Mijac Music, which owned musical compositions from a variety of artists, including Jackson.[4]

The IRS challenged the reported values of these three assets, leaving to the Tax Court the task of determining their fair market value at Jackson’s date of death. (The Estate and the IRS reached agreement prior to trial regarding Jackson’s other property.) The challenged assets were reported at $2.2 million, whereas the IRS claimed such assets were worth $964 million.[5]

Fair market value for estate tax purposes 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.

Being unique, the challenged assets lacked readily apparent market values. Thus, professional appraisers were retained by the parties to value such assets based on various metrics determined to be appropriate. Tax Court Judge Holmes discussed the three approaches that courts and appraisers use to value unique assets: 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.[6] As the Court stated, valuation disputes are questions of fact that are often battles of the experts. The Court, however, is not bound by any particular expert opinion and is free to accept or reject an expert’s opinion based on the Court’s own judgment.

 The Estate retained various experts to value the three items while the IRS used only one. Judge Holmes found that the credibility of the IRS’ expert was an especially important part of the case. “And it suffered greatly at trial.”[7] After finding that the IRS’ expert lied on the stand – having later corrected himself after a recess – Judge Holmes determined that the appropriate remedy would be to discount the weight given to that expert’s opinion.[8]

The Court undertook a thorough analysis of the valuations[9] and performed its own as well. 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. The Court discussed Jackson’s spending. With his income insufficient, Jackson borrowed against his interest in Sony/ATV, which at the time of his death secured over $300 million in loans. 

Ultimately, the Court made the following findings as opposed to the Estate and IRS valuations:

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 –
Mijac Music $2,267,316 $114,263,615 $107,313,561

In response, Jackson’s Executors declared: “This thoughtful ruling by the U.S. Tax Court is a huge, unambiguous victory for Michael Jackson’s children.  For nearly 12 years Michael’s Estate has maintained that the government’s valuation of Michael’s assets on the day he passed away was outrageous and unfair, one that would have saddled his heirs with an oppressive tax liability of more than $700 million. While we disagree with some portions of the decision, we believe it clearly exposes how unreasonable the IRS valuation was and provides a path forward to finally resolve this case in a fair and just manner.”[10]

[1] The Hollywood Reporter, Michael Jackson’s Executor, Manager Ordered to Testify in Billion-Dollar Tax Battle, December 8, 2016.

[2] T.C. Memo. 2021-048, May 4, 2021.

[3] Owned through New Horizon Trust II.

[4] Owned through New Horizon Trust III.

[5] By the time of trial the parties were only $476 million apart in value.

[6] Tax Court decision at p. 65.

[7] Tax Court decision at p. 59.

[8] The Estate wanted all of his testimony and his reports stricken.

[9] The experts for both the Estate and the IRS used the income approach.

[10] The Hollywood Reporter, Michael Jackson’s Likeness Valued at $4.1 Million in Big Tax Court Win for Estate, May 3, 2021.

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