Michael Jackson’s Estate claimed Jackson’s name and image were valueless upon his death. The IRS strongly disagreed. Can you imagine a world in which pop icon Michael Jackson’s name and image truly have no value??
That is the question at the heart of a recent federal tax court order that clocked in at almost 300 pages. The Court Order followed a lengthy trial between the IRS and Jackson’s Estate.
It is a stunning thought, that Michael Jackson’s “being” could be worth so little.
However, once you delve into the Court’s Order, you see how it actually makes some sense. At the end of his life, this destitute, erratic man who was once beloved the world over had become a shell of his former self, hounded by allegations that have never been proven or disproven. Surrounded by bizarre advisors, his business interests had utterly collapsed. People (& companies) didn’t want to be associated with him. Then, just as Jackson was trying to start a European tour that might revitalize his career, he died. Years later, his estate ended up in a lengthy dispute with the IRS over the valuation of three assets and whether enough federal taxes were paid.
The issue in dispute was the tax valuation of three assets of the Jackson estate. The first asset is Jackson’s Name, Image, and Likeness (NIL). The second asset is called the New Horizons Trust II (NHT II). The third asset is called the New Horizons Trust III (NHT III).
Disputed Assets
Most sports fans have heard of NIL (name, image, likeliness) in the context of NCAA college sports. It is the concept of the “right of publicity.” It is people’s ability to control the publicity surrounding their name, their image, and their likeness. In the NCAA context, superstar college football players want to be able to do commercials and profit off of those commercials. Similarly here, Michael Jackson could license out his NIL to sell merchandise, do commercials, or sell other good/services. People and organizations cannot use his NIL without his explicit consent.
Every person has a NIL, but not every person has a valued NIL. For example, I have a NIL. However, I will never be in a Subway commercial with Draymond Green and Jason Tatum. “Buy this sandwich, you can trust me, I’m a trust & estate lawyer” has an extremely low chance of coming up on your TV anytime soon. So, my NIL is valued at $0.00.
The other two assets – New Horizons Trusts II & III basically serve as houses to other assets. In the case of NHT II, it controls a stake in Sony publishing. NHT III is Mijack Music, which controls many copyrights owned by Jackson.
This whole lawsuit came about because after Jackson’s death, his estate filed a tax return. My clients file Estate tax returns all the time and are seldom (if ever) questioned the IRS. But none of them are managing a pop star’s legacy.
Upon review of the Estate Tax Return, the IRS alleged that they (Jackson’s trust/estate representatives) undervalued his estate by approximately $1,100,000,000.00. Yes, that is correct – $1.1 billion. The IRS levied approximately $700 million in taxes and penalties against the estate for the alleged undervaluing. As might be expected, the estate fought this. Now, the undervaluing is related to many more assets than just the three assets discussed here. However, the estate and the government managed to settle all the other issues – except these three. When parties can’t settle, those issues go to trial and the Court decides. As such, the trial focused solely on these three assets – Jackson’s Name/Image/Likeness and New Horizons Trusts II & III.
Few trusts and estates go to trial over asset valuation issues. More common issues tend to revolve around the trust or estate’s distribution terms or a will or trust’s validity.
Asset Information
The breakdown of the valuations is as follows:
Name/Image/Likeness (NIL): $2,105 reported on estate tax return. IRS values at $434,264,000. At trial, estate argues that value is $3,078,000. At trial, government argues that NIL value is $161,307,045. That’s about a $158 million dollar difference.
Court finds that NIL is valued at $4,153,912 – a major victory for the estate.
NHT II: $0 reported on estate tax return. IRS values at $469 million. At trial, estate maintains that that value is $0.00. At trial, government argues that value is $206 million. A $206 million dollar difference.
Court finds that NHT II is valued at $0.00, a total victory for the estate.
NHT III: $2,207,351 reported on estate tax return. IRS values at $60,685,944. At trial, estate argues that value is $2,267,316. At trial, government argues value is $114,263,614 – $112 million more than estate.
Court finds that NHT III is valued at $107,313,561, a major victory for the government.
It’s highly unlikely that my estate or yours would ever be litigated over such issues. Afterall, most of us are not celebrities with estates that will continue to produce huge sums of money after we die.
But, as vastly different as Michael Jackson’s Estate is from the average California Estate, I believe there is still something we can all take from what occurred here: Going to trial is risky, and you may lose far more than you would if you settle – even if you settle at a value you believe is far too low.
Obviously, I am not privy to the settlement communications between the government’s attorneys and those of the estate. But, in each of the three issues, one side comes very close to achieving its best case scenario – which means that one side comes close to realizing its worst case scenario.
Now, this is just a generalization based on hard numbers and “winning vs losing”. In practice, other factors can be at play in a trial scenario that might motivate one to go to trial despite the risks.
Overall however, I see settlement being the superior option to trial because of the power it gives both sides to decide their fates – and the ability it gives them to move on with their lives.