A Broken Man?

Subject: A Broken Man? 13th December 2016, 10:39 am

Code:: Originally posted by Nimue August 22, 2013

Michael Jackson's Estate To IRS: Beat It

Is it possible that the legacy of Michael Jackson could turn out to be a string of court cases. He has kept lawyers and business managers happily employed since he died -- and his tax lawyers are no exception. The estate for the King of Pop is planning to go to the mattress in the fight against the Internal Revenue Service over taxes and penalties assessed as a result of values reported on his federal estate tax return.

Michael Jackson died on June 25, 2009, in Los Angeles, California. The federal estate tax exemption amount was $3,500,000 for decedents dying in 2009. That means that estate assets in excess of that amount are taxed.

For federal purposes, estate tax is calculated on the net value of the assets in the control of the decedent as of the date of death. There is an election available to use the values as of six months after the date of death, as well. That election is referred to as AVD, or alternate valuation date, and is intended to account for the potential drop in the value of a decedent's estate due to fluctuations in the market or a drop in the value of the businesses owned by the decedent. That drop can happen to ordinary taxpayers like you and me but it's not the case for Michael Jackson who remains firmly near the top of Forbes' list of Top Earning Dead Celebrities.

Taxes payable as a result of the death of the decedent are the responsibility of the estate. Even though Jackson's will requires most of the taxes due to be paid out of his trust, the executors of the estate are legally responsible for filing and arranging for the payment of taxes. That's why, as a practical matter, the estate is suing the IRS. The case has been captioned (after an August 14, 2013 amendment) Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor, Petitioner(s) v. Commissioner of Internal Revenue, Respondent (017152-13 U.S. Tax Court) and was filed in U.S. Tax Court.

So why all the fighting? Jackson's estate was said to have been valued between $80 million and $500 million. That's, er, a lot of disparity. And that's exactly the problem.

The estate has valued the assets at lower amounts than the IRS believes to be appropriate. A number of assets are said to be at issue including Neverland Ranch, automobiles and amounts attributable to the singer's image, likeness and intellectual property.

Remember what I said earlier about the tax being imposed on the value as of the date of death? That would seem to mean that future dollars aren't taxable, right? Well, not exactly. For purposes of the federal estate tax, the ability to receive future payments is a valuable right. For tax purposes, the value is the projected future worth discounted to the present day -- or in simple terms, what a third party would pay today for the right to receive those payments in the future. In most cases, this calculation is figured on average annual earnings over a period of time (often five years).

This is easy when earnings are somewhat stable, as in the case of Elvis, who continued to earn a steady stream of income even when he wasn't performing.

But it's more difficult when a star's earnings rise and fall, as in the case of Michael Jackson. Just before his death, Jackson was thought to be spending more than he was making. According to the New York Times, in the early 2000s, Jackson blew through literally hundreds of millions of dollars of loans and lines of credit -- those loans were guaranteed by assets owned by Jackson. In that same time period, he only produced one studio album, the ironically titled Invincible, which would go on to sell only half of his 1995 effort, HIStory: Past, Present and Future, Book I, and only a fraction of his mega-block buster album, Thriller. Jackson was hit by scandal after scandal at the time -- and even as he was planning his controversial comeback tour -- it was clear that he wasn't the entertainer he used to be. His death, accelerated by drug use including propofol and benzodiazepines, and allegations about his health and lifestyle only add to the suggestion that the singer's stage presence would likely not have been as remarkable as it once was. How do you place a value on his projected earnings when it's hard to understand how the public might react to him?

The estate used an appraiser, of course. A qualified appraiser would take into consideration of those factors: reputation, star power and encumbrances on his earning potential. I'm guessing that the appraisal came back on the low side, based on an argument for date of death values. The estate is likely going to argue that the singer's future earning power was actually depressed and the subsequent boon to the estate, while nice, could not have been predicted as of the date of death.

Looking at how well the estate is doing now, however, the IRS likely takes a much different position. The estate has been pulling in considerable dollars: $170 million in 2011 and $145 million in 2012. The singer has earned more than any single living artist since his death. In fact, his estate made so much money after his death that it was anticipated that the singer's debts would be paid in full at the end of 2012.

How the public viewed Jackson likely also affects the valuation of his assets. Which valuation do you use, for example, for Neverland Ranch: the date of death value for the bizarre, neglected and poorly maintained site marred by scandal and allegations of child abuse? Or the singular home of the now practically canonized King of Pop?

It's an interesting set of questions. The valuations associated with "ordinary people" are much easier to assess because they are generally black and white. It boils down to a question of willing buyer and willing seller. But, with celebrities, it's a more difficult issue because so much of the value of an item is tied to how we view the celebrity. And over time, we forget about the bad stuff, including the scandals, the violence and the addictions. Sometimes, at death, the drunk becomes the artistic genius; the control freak becomes the industry icon and the thug was, we learned, really just misunderstood. The same is true for Jackson: now, it's not so creepy to be the teenage boy waxing on about Michael Jackson a la Justin Bieber

Resolving this case won't be as simple as pulling up a Kelley Blue Book value or finding a historic stock price. Valuation is subjective. And it's clear that the IRS and the estate don't see eye to eye on a number of issues. At stake is not just taxes and a few thousand dollars of interest: if the estate is found to have misrepresented the value of items on the return, penalties could run as high as 40%.

As is the rule with individual tax matters, the IRS has not issued a comment. Jackson's legal team stands firmly behind their court filings.

As for Jackson, with cases still pending in civil court and now this one in U.S. Tax Court, the star who was notoriously private during his lifetime has become one of the most talked about celebrities after his death.

http://www.forbes.com/sites/kellyphillipserb/2013/08/21/michael-jacksons-estate-to-irs-beat-it/