The Resolutions of the Michael Jackson and Prince Disputes Offer Lessons in Valuation
When Michael Jackson passed away in 2009, his death launched a four-year dispute between his estate and the IRS. The focus was three crucial assets: his interest in the Majic Music catalog; his name, image and likeness, and his part-ownership of Sony/ATV Music Publishing.
$2,000 or $161 million?
There’s no question that Jackson’s image and likeness at his time of death were worth much less than they had been at the peak of his popularity. In fact, according to an expert hired by the estate, his image and likeness generated just $24 in the last six months of his life.
On the estate’s 2009 tax return, using only the income method, the estate valued Jackson’s name and likeness at slightly more than $2,000, Majic Music at $2,207,351, and Jackson’s interest in Sony/ATV Music Publishing at $0.
The IRS audited the estate’s return in 2013 and issued a notice of deficiency, claiming the estate had underpaid its tax obligation on these and other assets by $500 million. The IRS also claimed an additional $200 million in penalties.
A trial in the U.S. Tax Court ensued. The estate retained four valuation experts to assess the three contested assets, arriving at a new value of $3 million for Jackson’s name and likeness and $2.7 million for Majic Music. Jackson’s interest in Sony/ATV Music Publishing remained at $0 due to various restrictions and encumbrances on his ownership. The estate tax affected the cash flows of these entities, a decision that the IRS would later challenge.
The IRS relied on one expert, Weston Anson, for its valuations. Anson arrived at a value of $161 million for Jackson’s name and likeness, $114 million for Majic Music, and $206 million for Sony/ATV Music Publishing.
Then, in a Hollywood twist, Anson’s credibility took a massive hit during the trial when he lied about his firm’s involvement in the valuation of Whitney Houston’s estate and about whether he advertised his involvement in the Jackson case to promote his business. The estate asked to strike Anson’s testimony and reports as “tainted by perjury,” but the Court considered that action too severe. Instead, the Court chose to “discount the credibility and weight” it gave to Anson’s testimony. Ouch!
The Court Weighs In
In its 271-page opinion, the Tax Court waded through myriad facts to arrive at a fair market value for the three assets, plus weighed in on whether the estate would have to pay the $200 million “gross-valuation misstatement penalty” the IRS imposed.
The Court discussed in detail the experts’ use of the income approach, the discounted cash flow method, projections, discount rates, discounts for lack of marketability and control, and synergies. The judge commented that Jackson’s assets required “active management” and that they had been managed with “stunningly greater competence” after his death “than they had been in Jackson’s own hands.” This underscored that the estate value was to be determined at the time of Jackson’s death, not after.
The Court rejected the tax affecting of the assets’ values, saying that the estate’s experts used inconsistent tax rates and failed to explain their hypothetical assumptions about likely buyers of the assets. The Court also slammed Anson’s valuation, citing his credibility, his failure to value the correct assets (he included non-image-and-likeness rights in his image-and-likeness valuation), and calculation errors.
Generally agreeing with the estate’s valuation, which the Court said was “much closer to reality,” it conducted its own calculation. The result: the Court valued Jackson’s image and likeness at just under $4.2 million. (The judge, known for his wit, noted that the estate’s original value of $2,105 was comparable to the “price of a heavily used, 20-year-old Honda Civic.”) It valued Jackson’s interest in Majic Music at $107 million and agreed with the estate’s $0 valuation of Sony/ATV Music Publishing.
The Court also found that the estate was not liable for IRS-imposed penalties relative to its initial tax return, saying that while the estate’s initial valuations were remarkably low, they were defensible, and the estate had acted in good faith.
A Real Thriller
While there are many takeaways from this “valuation of the century,” the biggest is that this was a clear victory for the Jackson estate.
Other reminders: Stick to what’s known or knowable at the valuation date (see Page 2), be sure to account for nuances in the industry in which the target entities operate and provide defense for any assumptions. Finally, if you are an expert witness and you want a judge to believe you, don’t damage your credibility by parsing the truth in court.
The good news for Jackson’s heirs is that the estate continues to grow, earning a peak of $825 million in 2016. In 2020, the estate earned a healthy $48 million, landing Michael Jackson at the top of Forbes’ “posthumous rich list.”
Prince Estate Settled Before Trial
Late 2021 saw the resolution of another dispute between a famed popstar and the IRS. The estate of Prince R. Nelson and the IRS agreed on a value of $156.4 million, which was closer to the IRS’s original valuation of $163.2 million. As part of the agreement, the IRS waived a $6.4 million penalty.
With the six-year dispute settled, Prince’s living heirs can now earn revenue from the artist’s real estate, music rights, and name, image, and likeness.
You don’t need to be a rock star to require expert valuation services. Whether you’re valuing a business or an estate, Dembo Jones’ experts can provide the crucial assistance necessary for transactions, litigation, and IRS disputes. Contact us today.